Bsef2012 session2 strategic_areasfordevelopment_ziemba

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Black Sea Region Amid Global Risks

By Rachel Ziemba, Director of Emerging Europe and Global Macro

© Roubini Global Economics Copyright 2011No reproducing or redistribution without written consent.

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• Global outlook remains bleak especially in Europe, with recession risks high.

• Policy response (stimulus) has bought time which helps EM, especially with greater trade/financial ties to EZ.

• Black sea countries have all slowed sharply in 2012, even Russia and Long-term growth remains uncertain

• Policy Response– Use policy space available to improve balance sheets– Infrastructure and Institutions

Global Headwinds For the Black Sea Region

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Global Growth: DM Stall, EZ Recession , EM Slowdown

Based on IMF PPP Weights for 2011 and 2012

3

Growth Inflation 2012 2013 2012 2013U.S. 2.2 1.6 2 1.8EZ -0.4 -0.6 2 1.7Japan 2.1 1.1 0.1 -0.4China 7.6 7.4 2.8 2.4G7 1.4 1.0 1.9 1.6Advanced Economies ₁ 1.2 0.8 1.8 1.5

Emerging and Frontier Markets 5.1 5.2 5.0 4.7Asia/Pacific ₂ 5.4 5.4 3.2 2.9Emerging Asia ₃ 6.2 6.3 3.9 3.5Latin America 6 3.4 3.6 8.5 7.8Emerging Europe 5 2.8 3.0 5.8 6.1Middle East and Africa 6 3.4 3.3 5.8 6.2BRIC 6.1 6.5 4.4 4.2World 3.2 3.0 3.4 3.1

1. U.S., Canada, Japan, UK, the eurozone, Sweden, Norway, Australia, Switzerland

2. Japan, Australia, China, India, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Vietnam, South Korea, Taiwan, Thailand

3. Asia/Pacific ex-Japan and Australia4. Brazil, Argentina, Mexico, Chile, Peru, Colombia, Venezuela 5. Czech Republic, Hungary, Poland, Turkey, Russia 6. Israel, Egypt, Saudi Arabia, the United Arab Emirates, South Africa


• ECB responses have bought time, but growth remains illusive, underming the outlook. Extensive coordination required to create a more consistent Eurozone.

• A disorderly default could add to financing strains – The chance of a Greek exit in next 12 months remains.

• US too will barely grow, as fiscal drag weighs on weak consumers• Chinese growth is slowing – After a small bounce in late 2012, Growth will begin

structural downshift in H2 2013, weighing on commodities (especially base metals)• EM too will be affected through trade and financing channels. • EMEA most exposed due to trade links and weaker balance sheets – still recovering

from past credit/asset booms. • Some good news –Inflation is mostly in check. Food prices are a risk. EEMEA epicenter

of drought meaning food prices an upside risk.

Buying Time… But will Policymakers Respond Enough


• Tepid recovery has prevented more of an improvement in regional balance sheets. • Eurozone supported regional recovery, especially Czech R and other countries shifted to

exports as primary growth driver. • New Trading partner - Countries are also trading more with China (especially

commodities) and receiving finance• Many economies (Hungary, Romania, Ukraine Baltics) had to begin fiscal austerity,

weakening domestic demand and overall growth. • Turkey has seen the size of its external deficit grow, credit growth soar, and now has

less policy space than in 2008. • Romania, Bulgaria and others remain constrained by high levels of FX lending and debt

service which adds to weak domestic demand and bank balance sheets. • But –EZ/US stimulus allowing some easing

EM Europe: Balance Sheet Vulnerabilities


– Financing strains could put pressure on currencies, debt and banks -> NPL, increase debt service

– Global weaknesses will exacerbate any domestic vulnerabilities, especially for Ukraine, Romania

– But policy space remains constrained, more so than in 2008.

– Medium-term outlook also uncertain as there is room to improve.

Effect on Black Sea


Emerging Europe/CIS Growth Slowing DownGrowth Falling or Staying Below Trend

Jul-2007

Aug-2007

Sep-2007

Oct-2007

Nov-2007

Dec-2007

Jan-2008

Feb-2008

Mar-2008

Apr-2008

May-2008

Jun-2008

Jul-2008

Aug-2008

Sep-2008

Oct-2008

Nov-2008

Dec-2008

Jan-2009

Feb-2009

Mar-2009

Apr-2009

May-2009

Jun-2009

Jul-2009

Aug-2009

Sep-2009

Oct-2009

Nov-2009

Dec-2009

Jan-2010

Feb-2010

Mar-2010

Apr-2010

May-2010

Jun-2010

Jul-2010

Aug-2010

Sep-2010

Oct-2010

Nov-2010

Dec-2010

Jan-2011

Feb-2011

Mar-2011

Apr-2011

May-2011

Jun-2011

Jul-2011

Aug-2011

Sep-2011

Oct-2011

Nov-2011

Dec-2011

Jan-2012

Feb-2012

Mar-2012

Apr-2012

May-2012

90

92

94

96

98

100

102

104

106

Czech Republic Germany HungaryPoland Euroarea Russia

OECD Leading Indicators Point to Slowdown


• EMEA balance sheets still weaker than Asia/Latam -> FX denominated debt.

• FX mismatches increase vulnerability to FX depreciation. • CBs still have cushions but are starting to run out of

reserves ammunition. • Easing Inflation, weakening growth prompts easing and

liquidity provision• Limited fiscal space.

How Much Policy Space


Balance Sheet Repair Is UnderwayExternal Debt (%GDP) Leveling Off External Deficits Forced to Improve

Hefty FX debt burden in Bulgaria, Romania Loan to Deposit Ratios Starting to Improve

Domestic FX loans (latest)(% GDP)

% FX credit in total

lending /2Total pvt sector

of which

Corp. HH

Bulgaria44.7 34.7 10.0 61.9

Georgia20.2 … … 74.3

Romania24.9 12.4 12.5 62.5

Russia 9.1 8.3 0.7 20.3Turkey 14.9 … … 27.8

Ukraine31.8 19.1 12.7 46.3


Black Sea Region: Still Scope to ImproveRegion: CIS Jun-12 Bulgaria Russia Ukraine Romania Turkey Georgia Average Greece

EM Eur Average

ScoresFirst pillar: External adjustment capacity 6.8 7.3 3.6 6.9 5.7 5.304413 5.9 3.524465 5.9Second pillar: Institutional robustness 7.8 6.8 5.6 7.7 5.7 5.731839 6.6 4.663801 6.9Third pillar: Medium term growth potential 4.0 4.6 4.6 4.0 5.2 5.204191 4.6 3.436175 4.7Fourth pillar: Social inclusion 6.8 5.5 6.0 6.0 6.1 6.81744 6.2 7.651164 6.7Sovereign Risk Index 7.3 7.1 4.6 7.3 5.7 5.518126 6.2 4.094133 6.4Total Indebtedness Indicator 7.7 9.2 7.7 9.4 8.6 8.913358 8.6 0.977564 7.7Vulnerability to Outflows 7.9 8.5 5.7 7.8 4.9 5.530949 6.7 3.369701 6.9Government Stimulus Ability 7.7 7.8 5.3 7.7 6.2 7.098906 6.9 3.080888 6.8Economic Flexibility 5.1 5.6 4.1 5.3 4.7 5.552529 5.1 3.507896 5.3Political Risk Indicator 5.6 2.7 5.0 5.3 3.9 4.002652 4.4 5.291576 5.4Business Environment 5.2 2.3 2.3 5.2 4.6 7.261583 4.5 5.046362 4.7Property Rights and Corporate Governance 4.1 3.5 3.5 4.6 4.6 4.002652 4.0 5.291576 4.7Innovation Capacity Indicator 3.0 4.5 3.5 2.5 3.5 2.489073 3.3 3.350159 4.4Multi-Dimensional Poverty Indicator 8.4 7.0 7.2 7.3 7.7 7.974089 7.6 9.466624 8.0Trade Vulnerability 6.5 1.2 5.6 8.6 9.6 5.234861 6.1 8.009526 7.4Quality of Governance 5.6 2.6 2.8 5.6 5.7 5.263814 4.6 6.621294 5.5Quality of Infrastructure 7.5 7.1 6.8 6.4 7.6 6.528074 7.0 8.095992 7.3Telecom Infrastructure 9.8 9.6 7.8 9.5 8.2 4.942433 8.3 9.708871 9.4Utility Infrastructure Indicator 7.9 7.1 7.7 5.6 8.4 8.70372 7.6 8.774535 7.8Transport Infrastructure Indicator 4.8 4.5 4.9 4.1 6.2 5.938068 5.1 5.804571 5.0Social, Institutional and Regulatory Risk 5.1 2.8 3.4 5.2 4.7 5.350367 4.4 5.452869 5.0


• Like many EM Medium-term growth outlook has stagnated as reforms put on hold during crisis.

• These reforms can increase resiliency to future shocks and increase potential growth, compensating for weak demographics/commodity dependency.

• Innovation/business environment low compared to other EM regions• Infrastructure ok, with telecoms stronger – space to improve transport,

particularly within country• Divided by demographics – strong in Turkey.• Governance stronger in Romania, Bulgaria and Turkey

Country by country: Medium-Term Challenges


• Agriculture -> Increase in productivity. Global Population growth -> agricultural commodities

• Space for infrastructure, especially transport technology transfer

• Convergence/catch up with advanced economies• Increase intra-regional trade reduce barriers• Improving macro/institutional frameworks. • Encourage innovation,

Long-term positives


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Bsef2012 session2 strategic_areasfordevelopment_ziemba