From Boom To Bust … and Back. · 20 . 25 . 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 Estonia Latvia Lithuania -30 -20 -10 . 0 . 10 . 20 . 30 . 40 . 50 . 2007

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.

2

Scope of the presentation

The Boom Years

Crisis Unfolding

Crisis Response

Recovery

Challenges

3

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

0

5

10

15

20

25

30

35

40

45 20

00-0

4

2005

-07

2000

-04

2005

-07

2000

-04

2005

-07

Estonia Latvia Lithuania

GDP Credit

Real Lending Rate

-10

-5

0

5

10

15

2000

M1

2000

M9

2001

M5

2002

M1

2002

M9

2003

M5

2004

M1

2004

M9

2005

M5

2006

M1

2006

M9

2007

M5

2008

M1


Source: WEO database; IFS.

4

The Boom Years: Property and Construction

Source: Eurostat

Share in Production Value

0%

5%

10%

15%

20%

25%

2000 2007 2000 2007 2000 2007


Real Estate

Construction

5

The Boom Years: Housing Prices

80

100

120

140

160

180

200

220 Estonia Latvia Lithuania Germany

Housing Prices (2005Q1=100, HICP deflated)

Source: Global Property Guide.

6

The Boom Years: Current Account & Foreign Debt

-25

-20

-15

-10

-5

0

2000 2001 2002 2003 2004 2005 2006 2007


Current Account Balance (as a percent of GDP)

0

20

40

60

80

100

120

140


2004-2007 2003

Gross External Debt (as a percent of GDP)

Source: WEO database, JEDH.

7

The Boom Years: Financial Vulnerabilities

75

100

125

150

175

200

225

250

2003 2004 2005 2006 2007 2008


Loan-to-Deposit Ratio

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% Lo

ans

Dep

osits

Loan

s

Dep

osits

Loan

s

Dep

osits

Foreign Domestic Estonia Latvia Lithuania

Currency Structure (end-2006)

Source: Haver.

8

The Boom Years: Fiscal Policy Stance

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

-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

age

Cyc

lical

ly-A

djus

ted

Fisc

al B

alan

ce (p

erce

nt o

f G

DP)

Source: WEO database.

9

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

Source: Eurostat; WEO database.

-20

-10

0

10

20

30

40

50

60

70

Estonia Latvia Lithuania Germany

2004-2007 2000-2003 2000-2007

10

Crisis Unfolding: Growth and Unemployment Unemployment Rate

(percent)

0

5

10

15

20

25

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


-30

-20

-10

0

10

20

30

40

50

2007 2009 2007 2009 2007 2009


Demand Credit

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

Source: Haver., WEO database.

11

Crisis Unfolding: Fiscal Pressures

0

2

4

6

8

10

12

14

16

18

20


2008: fiscal deficit 2009: deficit before measures

%

Fiscal Balance (percent of GDP)

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010


Government Debt (percent of GDP)

Source: Haver., WEO database.

12

Crisis Unfolding: Housing Prices

80

100

120

140

160

180

200

220 20

05Q

1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3


Source: Global Property Guide, Haver.

Housing Prices (2005Q1=100, HICP deflated)

13

Crisis Unfolding: Credit and NPLs

-2

0

2

4

6

8

10

12

14

16

18

-10

0

10

20

30

40

50

60

70

80

90 20

05Q

1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

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.

14

Policy Response: Internal Devaluation

-40

-20

0

20

40

60

80


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

90

95

100

105

110

115

120

Jan-

2007

M

ay-2

007

Sep-

2007

Ja

n-20

08

May

-200

8 Se

p-20

08

Jan-

2009

M

ay-2

009

Sep-

2009

Ja

n-20

10

May

-201

0 Se

p-20

10


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

Source: Eurostat, Haver.

15

Policy Response: Fiscal Adjustment

0

2

4

6

8

10

12


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

%

Exp

endi

ture

Re

venu

e

2009 Fiscal Adjustment (percent of GDP)

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

16

Policy Response: External Support

Concerted efforts to maintain bank exposure

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

17

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


100

120

140

160

180

200

220

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


18

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


100

120

140

160

180

200

220

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

GDP levels Domestic Demand levels:


Recovery: Domestic Demand

19

Recovery: Unemployment Rate

Source: IMF Staff Reports, IFS

Unemployment rate (percent)

0

5

10

15

20

25 20

07Q

1 20

07Q

2 20

07Q

3 20

07Q

4 20

08Q

1 20

08Q

2 20

08Q

3 20

08Q

4 20

09Q

1 20

09Q

2 20

09Q

3 20

09Q

4 20

10Q

1 20

10Q

2 20

10Q

3 20

10Q

4

2011

2012


20

Recovery: Consumer Prices

Source: IMF Staff Reports, IFS

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

-10

-5

0

5

10

15

20 1/

1/20

07

3/1/

2007

5/

1/20

07

7/1/

2007

9/

1/20

07

11/1

/200

7 1/

1/20

08

3/1/

2008

5/

1/20

08

7/1/

2008

9/

1/20

08

11/1

/200

8 1/

1/20

09

3/1/

2009

5/

1/20

09

7/1/

2009

9/

1/20

09

11/1

/200

9 1/

1/20

10

3/1/

2010

5/

1/20

10

7/1/

2010

9/

1/20

10

11/1

/201

0 1/

1/20

11

2011

2012


21

Recovery: Export led growth

Source: IMF REO, WEO database

-30

-25

-20

-15

-10

-5

0

5

10

15

20

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


Real Exports Real Domestic Demand Real GDP

Growth Components (percent change)

22

Recovery: Real Exports

Source: WEO database

100

120

140

160

180

200

220

240

260

280 20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


Real Exports of Goods and Services (2000=100)

23 Source: WEO database

Current Account Balance (percent of GDP)

-25

-20

-15

-10

-5

0

5

10

2004 2005 2006 2007 2008 2009 2010 2011 2012


Recovery: Current Account Balance

24

Recovery: Market Confidence

0

200

400

600

800

1000

1200

1400

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

25

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

Source: IFS.

0

20

40

60

80

100

120

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


26

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

Source: IMF Staff Reports.

0

2

4

6

8

10

12

14

16

18

20 20

08Q

1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

end-

2010


27

-10

-8

-6

-4

-2

0

2

4

0 10 20 30 40 50 60


Challenges: Fiscal Consolidation


2000

2000

2000

2012

2012

Fisc

al B

alan

ce (p

erce

nt o

f G

DP)

Public Debt (percent of GDP)

„Maastricht zone”

2012

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

28

Challenges: Improving Competitiveness

-40

-20

0

20

40

60

80


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

90

95

100

105

110

115

120

Jan-

2007

M

ay-2

007

Sep-

2007

Ja

n-20

08

May

-200

8 Se

p-20

08

Jan-

2009

M

ay-2

009

Sep-

2009

Ja

n-20

10

May

-201

0 Se

p-20

10


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

Source: Eurostat, Haver.

29

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.

30

Thank you

Documents

From Boom To Bust … and Back. · 20 . 25 . 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 Estonia Latvia Lithuania -30 -20 -10 . 0 . 10 . 20 . 30 . 40 . 50 . 2007