25 Years of Transition Post-Communist Europe and the IMF

Building Market Economies in Europe Warsaw, October 24, 2014

Aasim M. Husain

Deputy Director

European Department, IMF

Outline

2

Overview

Stabilization

Reforms

Integration

Legacies & Challenges

Building Market Economies in Europe Warsaw, October 24, 2014

Aasim M. Husain

Deputy Director

European Department, IMF

25 Years of Transition Post-Communist Europe and the IMF

Euro area European Union EU candidate / potential candidate European Free Trade Area Comecon CIS Other socialist economies Other economies

Transformation

European Union and predecessors

EU candidate / potential candidate

Comecon

Euro area

European Free Trade Association

Other socialist economies

Other economies

CIS*

*Ukraine has declared its intention to leave the CIS

2014

1989

1982

1972

1986

1991

1992

1992

1992

1992

1992

1992

1992

1992

1993

1993

1993

1993

1993

1995

2009 2007

IMF membership

1990

Overview

Growth and convergence

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

-25

-20

-15

-10

-5

0

5

10

Source: WEO; various sources for some countries in early years. Note: See country codes box for composition of regional averages. CEE average weighted by GDP, others unweighted.

percent

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Slovenia Czech Republic Hungary Slovak Republic Croatia Russia Poland Romania Estonia Bulgaria Lithuania Latvia Montenegro FYR Macedonia Serbia Belarus Bosnia and Herz. Ukraine Albania Moldova

Income convergence to EU15 level (percent)

Available as of 1990

Overview

Outline

Overview

Stabilization

Reforms

Integration

Legacies & Challenges

1

10

100

1000

10000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

6

Price stabilization Lo

garith

mic

sca

le H

yperinflatio

n

Mo

dera

te inflatio

n

Price inflation

(end-year, percent)

Bulgaria

Ukraine

Belarus

Interquartile range

Belarus

Serbia

Min-max range

Median

Stabilization

Exchange rate regimes

Floating

Managed and

crawling

Peg and currency

board

Eurozone and

no separate legal

tender

AlbaniaPolandCzech RepublicMoldovaRomaniaSerbiaHungaryUkraineRussiaMacedoniaCroatiaBelarusLithuaniaBosnia and Herz.BulgariaSloveniaSlovak RepublicEstoniaLatviaMontenegroKosovo

1990 1995 2000 2005 2010

Exchange rate regimes in CEE

I T

I T

I T

I T

I T

I T

I T

Stabilization

8

Real appreciation

40

60

80

100

120

140

160

180

200

220

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

fixed exchange rate countries1/

floating exchange rate countries2/

CEE average

1/ BGR, EST, LVA, LTU.

2/ ALB, CZE, MDA, POL, ROU

Average

Range

Floating exchange rate countries2/

CEE average Fixed exchange rate countries1/

Stabilization

IMF-supported programs

HUN

YUG POL

YUG

CSK

HUN

BGR

ROM

POL

BGR

ROM

RUS

LVA

EST

LTU

MDA

LTU

UKR

RUS RUS

HRV

BGR

ROM

UKR

BGR

-40

-30

-20

-10

0

10

1987 1989 1991 1993 1995 1997 1999

Perc

ent

chang

e in r

eal G

DP

1/

1/ Maximum cumulative decline in three years from program inception (or lowest growth if no decline).

IMF programs in CEE - lending volume and output declines

Lending volume=100 percent of quota

2/ Only non-concessional arrangements.

= Program arrangements

= Arrangements in other regions2/

0

5

10

15

20

25

30

35

40

45

1990 1995 2000 2005 2010

CIS

SEE non-EU

SEE EU

Baltics

CE5

Technical assistance

(person years)

0

100

200

300

400

500

600

700

800

1990 1995 2000 2005 2010

Staff training

(number of participants)

Stabilization

Outline

Overview

Stabilization

Reforms

Integration

Legacies & Challenges

1,0

1,5

2,0

2,5

3,0

3,5

4,0

1989 1993 1997 2001 2005 2009 2013

SEE xEU

Baltics

CE5

SEE EU CIS

Structural transformation Reforms

1,0

1,5

2,0

2,5

3,0

3,5

4,0

1989 1993 1997 2001 2005 2009 2013

Competition policy

Large-scale privatization Trade and forex

Small-scale privatization

Governance and enterprise restructuring

Price liberalization

Average EBRD

transition indicator

max

Privatization

0

10

20

30

40

50

60

70

80

90

Private sector shares in GDP

percent of GDP

Reforms

1990

chang

e 1

990-2

001

2001

Pace and growth

Effect of Pace of Transition

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1,0

1991 1994 1997 2000 2003 2006 2009 2012

Pro

bab

ility

of re

cove

ring

pre

-tra

nsi

tio

n in

com

e le

vel 2

/

40

60

80

100

120

140

160

180

1 2 3 4

EBRD Composite Transition Indicator

GD

P p

er

cap

ita

(PP

P, co

nst

ant

2005 inte

rnatio

nal $

), 1

990=

100 1991-2012

Pace of Transition and Income Recovery

1/ Probabilities are based on regression estimates and historical series

of EBRD transition indicators.

2/ Probability of reaching pre-transition (1990) level of GDP per capita

(PPP, constant 2005 international dollars).

Slow and

incomplete

transition (CIS)

Delayed transition

(SEE)

Aggressive and

Frontloaded

transition (CEB)

SEE CEB CIS

Reforms

EU accession

Average of EBRD competition policy and governance and restructuring indicators

EU accession

NMS 2004 (excl. Baltics)

Baltics

NMS2007

1,0

1,5

2,0

2,5

3,0

3,5

4,0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Reforms

Croatia

Outline

Overview

Stabilization

Reforms

Integration

Legacies & Challenges

16

Source: IMF, Directions of Trade; WEO.

Exports of goods and

services as percent of GDP: 20 100

Export directions Integration

Foreign bank participation

0

10

20

30

40

50

60

70

80

90

100

1996 1998 2000 2002 2004 2006 2008 2010 2012

CE5

SEE xEU

Baltics

SEE EU

CIS

Foreign bank participation

(percent of banking sector assets)

Integration

Unicredit

Commerz-

bank

Raiff-eisen

Erste

Hypo

Intesa

SEB

bank

Swed-

bank

VTB

Sberbank

NLB OTP

Other foreign banks*

Domestic banks

of which:

subsidiaries in CEE

Parent banks assets: Host countries

banking sector assets:

ING

KBC

SocGen

Vo

lum

e =

EU

R100 b

illio

n

Parent banks from CEE region

Selected foreign banks

* Other banks include: Alpha Bank, Citibank, DNB, Eurobank, GE Money,

Millennium BCP, National Bank of Greece, Santander and Sparkasse.

* Other banks include: Santander, Citibank (POL); Sparkasse (BIH) ,National Bank

of Greece, Eurobank (BGR), GE(CZE), BAYERISCHE LANDESBANK (HUN), DNB (EST, LVA, LIT), Alpha Bank (ROU)

Foreign banks operating in CEE

25 Y

ears

of

Tra

nsi

tio

n: P

ost

-Co

mm

unis

t Eu

rop

e a

nd th

e IM

F

Reg

ion

al E

cono

mic

Issu

es.

Eu

rope. S

peci

al R

ep

ort

Integration

Imbalances

-10

-5

0

5

10

-30

-20

-10

0

10

20

30

2000 2001 2002 2003 2004 2005 2006 2007

-15

-10

-5

0

0 5 10 15

Country correlations

Annual increase in

private credit

(percent of GDP)

Current account

balance

(percent of GDP)

2002-07 averages

Real growth credit

percent of GDP

percent

per annum

Current account balance

Integration

Imbalances

-10

-5

0

5

10

-30

-20

-10

0

10

20

30

2000 2001 2002 2003 2004 2005 2006 2007

-15

-10

-5

0

0 5 10 15

Current account balance

Real growth credit

percent of GDP

percent

per annum Annual increase in private

percent of GDP

2002-07 averages

Integration

Credit boom

Ext

ern

al im

bala

nce

s

IMF involvement

HUN

YUG POL

YUG

CSK

HUN

BGR

ROM

POL

BGR

ROM

RUS

LVA

EST

LTU

MDA

LTU

UKR

RUS RUS

HRV

BGR

ROM

UKR

BGR SRB

POL

LVA

ROM HUN

POL

UKR

UKR

BIH MKD

BLR

SRB

ALB

BIH SRB

UVK

-40

-30

-20

-10

0

10

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Perc

ent

chang

e in r

eal G

DP

1/

1/ Maximum cumulutive decline in three years from program inception (or lowest growth if no decline).

Lending volume=100 percent of quota

2/ Only non-concessional arrangements.

Integration

= Program arrangements

= FCL/PLL precautionary arrangements

= Arrangements in other regions2/

IMF programs in CEE - lending volume and output declines

Outline

Overview

Stabilization

Reforms

Integration

Legacies & Challenges

Convergence

0

10

20

30

40

50

60

1992 1997 2002 2007 2012

Baltics

CE5

SEE EU

SEE xEU

CIS

Legacies & Challenges

Income levels relative to advanced economies (Percent of advanced economies GDP per head at PPP)

Emerging Asia

Latin America

Potential output

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012 2014 2016

CEE

Other emerging markets

Potential output slowdown (Percent, average growth)

Source: WEO and IMF staff calculations.

Note: "Other Emerging Markets" includes Argentina, Brazil, Chile, India, Indonesia, Malaysia,

Mexico, South Africa, and Thailand.

Legacies & Challenges

Note: See country code box for country flags.

Source: BIS locational statistics.

Stronger inflow

in boom period

XR adjusted changes in claims of foreign banks on selected economies as percent of average GDP (2004-

2013), locational stats

Banking flows, 2004-2008

Banki

ng

flo

ws,

2009-2

013

Chang

e in

cre

dit t

o G

DP r

atio

, 2004-2

008

-50

-40

-30

-20

-10

0

10

20

30

40

50

0 10 20 30 40 50 60 70 80 90

Str

on

ger

ou

tflo

w

in b

ust

peri

od

Str

on

ger

cred

it g

row

th

in b

oo

m p

eri

od

Deleveraging Legacies & Challenges

NPLs and financing

Nonperforming loans (percent of gross loans)

0

2

4

6

8

10

12

14

16

18

20

2007 2008 2009 2010 2011 2012 2013

Baltics SEE EU

SEE xEU

CE5

CIS

Legacies & Challenges

Business climate

0102030405060708090100

Ease of Doing Business Ranking, 2014

Global Competitiveness Ranking, 2013-2014

Transparency International – Corruption perceptions, 2013

Position in ranking, normalized (1-100)

Legacies & Challenges

Fiscal projections

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

0 10 20 30 40 50 60 70 80

Fiscal projections for 2014 (percent of GDP)

Public debt

Fisc

al b

ala

nce

Note: See country code box for country flags.

Source: WEO.

"Maastricht zone"

Legacies & Challenges

Demographics

50

55

60

65

70

75

2000 2010 2020 2030 2040 2050 2060

Shrinking working age populations (share of people aged 15-64 in population)

CEE

forecasts

Legacies & Challenges

China

Less developed countries

Japan

Germany

USA

Labor markets

BIH 2/

MKD 1/

SRB 1/

HRV 1/

MNE 1/

SVK

BGR

ALB 2/

POL ROM

HUN LVA

EST

LTU

SVN

CZE 0

5

10

15

20

25

30

15 25 35 45 55 65

Lo

ng

-term

un

em

plo

ym

en

t ra

te (

> 1

year)

Youth unemployment rate (age 15-24)

Sources: Country authorities; OECD; Haver; Eurostat; CEA: and IMF

staff calculations.

1/ 2012

2/ Balkan average used for long-term unemployment rate. due to

missing data.

Youth and long-term unemployment

2013

0

5

10

15

20

25

30

35

40

45

0 5 000 10 000 15 000Stock of FDI liabilities, US$ per capita

Real la

bo

r p

rod

uct

ivit

y

(perc

en

t o

f Eu

ro A

rea)

CIS

CEB

SEE EU

SEE xEU

2012

2005

2012

2005

2005

2005

2012

2012

Source: WEO; Haver; IMF IIP Database; IMF staff calculations.

FDI and labor productivity

35

40

45

50

55

60

0 5 10 15 20 25

Unemployment rate (percent)

Em

plo

yment

rate

(p

erc

ent

of

po

pula

tio

n 1

5+

)

Legacies & Challenges

Labor market trends, 1991-2012

CIS

SEE EU

1993

Baltics

CE5

1993

1996

EU15

1991

1991

SEE xEU

1991

Then and now Legacies & Challenges

Simplified dendrogram

1998-2000 2011-2013

Dziękuję