From Boom To Bust … and Back. · 20 . 25 . 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1...

From Boom To Bust … and Back.

German-Baltic Chamber of Commerce Riga, March 31, 2011

Mark Allen Senior IMF Resident Representative for Central and

Eastern Europe

The views expressed in this Presentation are those of the author and do not necessarily represent those of the IMF or IMF policy.

Scope of the presentation

The Boom Years

Crisis Unfolding

Crisis Response

Recovery

Challenges

The Boom Years: Growth and Credit Average Real GDP and Real Credit Growth

Estonia Latvia Lithuania

GDP Credit

Real Lending Rate

Source: WEO database; IFS.

The Boom Years: Property and Construction

Source: Eurostat

Share in Production Value

2000 2007 2000 2007 2000 2007

Real Estate

Construction

The Boom Years: Housing Prices

220 Estonia Latvia Lithuania Germany

Housing Prices (2005Q1=100, HICP deflated)

Source: Global Property Guide.

The Boom Years: Current Account & Foreign Debt

2000 2001 2002 2003 2004 2005 2006 2007

Current Account Balance (as a percent of GDP)

2004-2007 2003

Gross External Debt (as a percent of GDP)

Source: WEO database, JEDH.

The Boom Years: Financial Vulnerabilities

2003 2004 2005 2006 2007 2008

Loan-to-Deposit Ratio

100% Lo

Foreign Domestic Estonia Latvia Lithuania

Currency Structure (end-2006)

Source: Haver.

The Boom Years: Fiscal Policy Stance

-3 -2 -1 0 1 2 3

2000-04

2005-07

2000-04 2005-07

2005-07

2000-04

Average Fiscal Balance (percent of GDP) Aver

Source: WEO database.

The Boom Years: Competitiveness ULC-weighted REER appreciation (percent increase from 2000)

Source: Eurostat; WEO database.

Estonia Latvia Lithuania Germany

2004-2007 2000-2003 2000-2007

Crisis Unfolding: Growth and Unemployment Unemployment Rate

(percent)

2007 2009 2007 2009 2007 2009

Demand Credit

Domestic Demand and Credit Growth (year-on-year percent change)

Source: Haver., WEO database.

Crisis Unfolding: Fiscal Pressures

2008: fiscal deficit 2009: deficit before measures

Fiscal Balance (percent of GDP)

2006 2007 2008 2009 2010

Government Debt (percent of GDP)

Source: Haver., WEO database.

Crisis Unfolding: Housing Prices

220 20

Source: Global Property Guide, Haver.

Housing Prices (2005Q1=100, HICP deflated)

Crisis Unfolding: Credit and NPLs

Estonia Credit Latvia Credit Lithuania Credit Estonia NPLs (rhs) Latvia NPLs (rhs) Lithuania NPLs (rhs)

Non-performing Loans to Total Loans (percent ) and Credit Growth (year-on-year percent change)

Source: Global Property Guide, GFSR.

Policy Response: Internal Devaluation

2008-2010Q2 2004-2007 2000-2003 2000-2010Q2

ULC-based REER Wages (Jan-07=100)

Source: Eurostat, Haver.

Policy Response: Fiscal Adjustment

Expenditure: Structural Expenditure: Current & Temporary Revenue: Other Revenue: Durable

2009 Fiscal Adjustment (percent of GDP)

Source: IMF Staff reports and staff estimates based on country authorities budgets.

Policy Response: External Support

Concerted efforts to maintain bank exposure

Swap line with Riksbank (Estonia) IMF and EU program support (Latvia)

Recovery: Real GDP Real GDP levels (2000=100)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Real GDP and Real Domestic Demand levels (2000=100)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP levels Domestic Demand levels:

Recovery: Domestic Demand

Recovery: Unemployment Rate

Source: IMF Staff Reports, IFS

Unemployment rate (percent)

Recovery: Consumer Prices

Source: IMF Staff Reports, IFS

Consumer Price Index (year-on-year percent change)

Recovery: Export led growth

Source: IMF REO, WEO database

2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012

Real Exports Real Domestic Demand Real GDP

Growth Components (percent change)

Recovery: Real Exports

Source: WEO database

280 20

Real Exports of Goods and Services (2000=100)

23 Source: WEO database

Current Account Balance (percent of GDP)

2004 2005 2006 2007 2008 2009 2010 2011 2012

Recovery: Current Account Balance

Recovery: Market Confidence

1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011

Greece Ireland Portugal Source: Bloomberg.

Credit Default Swaps spreads

Challenges: Deleveraging Claims on Private Sector (percent of GDP)

Source: IFS.

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1

Challenges: NPL Non-performing loans (percent of total loans)

Source: IMF Staff Reports.

0 10 20 30 40 50 60

Challenges: Fiscal Consolidation

Public Debt (percent of GDP)

„Maastricht zone”

2007 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012

Challenges: Improving Competitiveness

2008-2010Q2 2004-2007 2000-2003 2000-2010Q2

ULC-based REER Wages (Jan-07=100)

Source: Eurostat, Haver.

Challenges: Obstacles to Business

0 10 20 30 40 50 60 70 80

Latvia

Lithuania

Estonia

Germany

Global Competitiveness Index Infrastructure (quality of roads, railroads, ports and air transport infrastructure) Labor market efficiency (ridgity of employment, flexibility of wage determination) Institutions (efficiency of legal framework, strength of investor protection, organized crime) Goods market efficiency (extent and effect of taxation, trade tariffs and barriers)

Estonia

2010-2011

Structural Weaknesses

Source: Global Competitiveness Report.

Thank you

From Boom To Bust … and Back. · 20 . 25 . 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1...

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