Regional Economic Issues in CESEE

JVI Lecture,

Vienna, February 8, 2017

Bas B. Bakker

Senior Regional Resident Representative

for Central and Eastern Europe

Outlook for CESEE

2

-10

-8

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Within CESEE dichotomy: CIS was in

recession, but non-CIS fairly strong

3

PPP weighted real GDP growth

(Percent)

CIS

Other CESEE

-20

-15

-10

-5

0

5

10

15

2005 2007 2009 2011 2013 2015

CIS was hit by oil price decline, sanctions and

conflict in Ukraine, but is now recovering

4

-100

-75

-50

-25

0

25

50

75

100

-20

-15

-10

-5

0

5

10

15

2005 2007 2009 2011 2013 2015

RUS

Oil prices

(right axis)

Real GDP growth in Russia, other CIS countries and changes in oil prices

(Percent, y/y)

UKR

RUS

BLR

By contrast, EU new member states continue to

recover from 2009 crisis

5

-10

-5

0

5

10

15

20

25

30

SVN HRV CZE HUN EST LVA ROM BGR SVK LTU POL

Real GDP per capita growth, 2008-16

(Percent)

-4

-3

-2

-1

0

1

2

3

4

5

6

BLR RUS UKR EST HRV MDA HUN MKD SVN CZE SRB LVA LTU BIH BGR POL ALB SVK UVK ROM MNE

October 2016 WEO projections: pick-up in CIS in 2017,

and continued strong growth in rest of CESEE

6

GDP growth

(Percent)

2017

2016

After projections were made Donald Trump was

elected, which was not quite expected by markets

7

Since the election there has been a sharp

increase in US long-term interest rates

8

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

US Elections

DEU

GBR

USA

JPN

10Y Government Bond Yields

(Percent, 5-day moving average)

85

90

95

100

105

110

115

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

…as financial markets have become more

optimistic…

9

S&P 500EuroStoxx 50

Stock Market Indices

(Day of US Elections=100, 5-day moving average)

US Elections

Nikkei 225

96

97

98

99

100

101

102

103

104

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

Dollar appreciated strongly

10

Exchange rate of USD against G20* currencies

(Day of US Elections=100, GDP-weighted)

US Elections

*DEU, FRA, ITA and EU are replaced by EA.

G20 countries

Emerging Markets of G20

4

5

6

7

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Financial conditions for EMs have tightened,

but spreads broadly unchanged

11

Emerging Market Bond Index Plus

EM composite

Emerging Europe

US Elections

250

300

350

400

450

500

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

US Elections

EM composite

Emerging Europe

Spread

(Basis points)

Yield

(Percent)

95

100

105

110

115

120

125

130

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

In CESEE, exchange rates have depreciated vis-

à-vis dollar, except RUB (oil prices up)

12

Exchange rates of USD against selected currencies

(Day of US Elections=100, 5-day moving average)

RUB

HUF

RON

PLN

US Elections

Markets seem to anticipate US fiscal stimulus and

higher US growth. What does this mean for CESEE?

Stronger US growth

Will boost exports, but at risk of more protectionism

May boost commodity prices

Stronger dollar

Helps exporters

Negative balance sheet effects for dollar-indebted

Higher financing costs

Hurts countries with weak growth

May help countries that are advanced in the cycle

13

For CESEE overall impact likely to be

modest

But this will depend on US policies, which are not

quite clear at this stage.

There are also risks:

Increase in US protectionism, which could lead

to trade war

With already low unemployment, large fiscal

stimulus could lead to much faster than

expected monetary tightening.

14

Indeed, projections for CESEE roughly

unchanged

15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CIS Euro area Baltics CE-5 SEE non-EU SEE EU

GDP growth in 2017 according to different WEO vintages

(Percent)

WEO Oct-16

WEO Jan-17

Bigger risk may be Europe. Unhappiness with EU has

increased sharply in past decade…

16

Level of confidence in the European Union

(Percent of population surveyed by Eurobarometer)

Further fueled by concerns about

migrations and economy

17

Most important issues facing the EU countries in 2016

(According to Eurobarometer)

There are a number of important

elections in 2017

18

French presidential elections

German federal elections

Dutch general elections

(Possibly) Italian general elections

How will this affect further expansion to

Western Balkans?

19

Remaining and future

challenges

20

The 2009 crisis was deep, but most CESEE countries

have recovered to above pre-crisis levels

21

-30

-20

-10

0

10

20

30

GRC UKR ITA SVN HRV PRT ESP RUS SRB CZE HUN EST MNE BIH LVA BLR ROM BGR SVK MKD LTU ALB MDA POL

GDP growth per capita, 2008-16

(percent)

Unemployment in the EU New Member states

is coming down rapidly

22

-4

-2

0

2

4

6

8

10

12

14

2007 2009 2011 2013 2015

-4

-2

0

2

4

6

8

10

12

14

2007 2009 2011 2013 2015

Cumulative changes in unemployment rate

(2008Q1=0, seasonally adjusted)

LTU

EST

LVA

HUNPOL

SVKCZE

ROU

SVN

HRV

BGR

23

Financial sector:

High share of non-performing loans

Government sector:

Rebuild fiscal buffers

However, there are crisis legacies

0

5

10

15

20

25

30

35

EST TUR LVA POL SVK CZE LTU MKD SVN RUS HUN ROM BLR BIH MNE MDA HRV ALB BGR SRB UKR

Clean up banks’ balance sheets:

NPLs have come down (although they are still high in

SEE and Ukraine)

24

2012

2016

Non-performing loans to total loans, 2016

(Percent)

Note: for MNE and BGR data for 2012 and 2015.

How to deal with high NPLs?

25

Fiscal deficits have declined to more modest levels…

Fiscal balance

(Percent of GDP)

But public debt is no longer low

Public debt

(Percent of GDP)

In past 25 years, region has made tremendous

progress

28

But more recently, convergence has

slowed

29

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Real GDP per capita

(Percent of Germany)

CE-5

Baltics

SEE EU

CIS

SEE non-EU

0

10

20

30

40

50

60

0 10 20 30 40 50 60 70 80 90 100

Further convergence will require both higher

labor input and labor productivity

30

Labor productivity and employment to total population ratio, 2015

Flags size reflects GDP per capita in 2015 (PPP-adjusted).

Em

plo

ym

en

t to

to

tal p

op

ula

tio

n r

ati

o

(perc

en

t)

Labor productivity

(PPP adjusted 2014 USD, thousands)

65

66

67

68

69

70

71

72

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Labor input looks relatively high, but this is partly

because a large share of the population is between

15 and 64 (working age)

31

CIS

SEE non-EU

CE-5

SEE EU

Baltics

Population ages 15-64

(percent of total population)

Note: Simple average of given countries.

Germany

0

10

20

30

40

50

60

70

80

90

0 10 20 30 40 50 60 70 80 90 100

If we compare employment to working age

population rate differences in labor input with

Germany are more pronounced

32

Em

plo

ym

en

t ra

te

(perc

en

t o

f w

ork

ing

ag

e p

op

.)

Labor productivity

(PPP adjusted 2014 USD, thousands)

Labor productivity and utilization, 2015

Flags size reflects GDP per capita in 2015 (PPP-adjusted).

50

55

60

65

70

75

80

2000 2002 2004 2006 2008 2010 2012 2014

Indeed, employment rates are still well below

Germany—with the exception of Baltics

33

20

25

30

35

40

45

50

2000 2002 2004 2006 2008 2010 2012 2014

DEU

Baltics

CE-5

SEE EU

CIS

SEE non-EU

Employment rate

(percent)

Note: Simple average of given countries.

Aging will accelerate in the next decade

34

Working age (15-64) population growth

(percent)

Emigration exacerbates the labor supply

problem

35

It will be important to increase labor

force participation, including of women

36

Labor force participation rate, 2015

(percent of either male or female population ages 15-64)

Male Female

30

40

50

60

70

80

90

MD

A

BIH

BLR

HR

V

SR

B

UK

R

BG

R

ALB

PO

L

HU

N

RO

M

SV

N

LTU

MK

D

SV

K

LV

A

RU

S

EST

CZ

E

DEU

30

40

50

60

70

80

90

BIH

MD

A

MK

D

ALB

SR

B

RO

M

UK

R

PO

L

HR

V

HU

N

SV

K

BG

R

BLR

CZ

E

SV

N

RU

S

LTU

LV

A

EST

DEU

While higher labor input will help, higher capital stock

and thereby labor productivity may be even more

important

37

AUT

BEL

CYP

EST

FIN

FRA

DEU

GRC

IRL

ITA

LVA

LTU

LUX

MLT

NLD

PRT

SVK

SVNESP

BGR

HRV

CZE

DNK

HUN

POL

ROU

SWE

GBP

y = 0.3451x + 1.6927

R² = 0.8514

0

10

20

30

40

50

60

70

80

90

0 50 100 150 200

Capital stock and GDP per capita, 2015

(thousands of 2010 EUR)

Capital stock per capita

GD

P p

er

cap

ita

AUT

BEL

CYP

EST

FIN

FRADEU

GRC

IRL

ITA

LVA

LTU

LUX

MLT

NLD

PRTSVK

SVNESP

BGRHRV

CZE

DNK

HUNPOL

ROU

SWEGBP

y = 0.7094x - 6.5368

R² = 0.0276

0

10

20

30

40

50

60

70

80

90

35 40 45 50 55

Employment to population ratio and GDP per

capita, 2015

(percent and thousands of 2010 EUR)

Employment to population ratio

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

However, growth of capital stock has

slowed…

38

ROM

EST

CZE

SVK

HUN

Net capital stock per worker growth

(3-year annualized change, percent)

…as investment rates post-crisis are (too)

low.

39

Investment to GDP ratio, 2015

(percent)

0

5

10

15

20

25

30

35

UKR BIH SRB HRV SVN POL LTU BGR HUN RUS LVA SVK MDA EST ROM CZE MNE ALB UVK BLR

Emerging markets and developing economies

Low investment not only problem: TFP

growth has slowed as well…

40

Average total factor productivity growth

(percent)

So what should be done?

41

Address factors that might constrain

productivity (REI May-16)

Insufficient protection of property rights and

Inefficient legal systems and other government

services

Limited access to financial services (e.g. for

SMEs)

Infrastructural gaps

42

Improve public investment management

and tax administration (REI Nov-16)

Closing efficiency gaps in public investment and tax collection could bring sizable benefits.

Further upgrades of public investment management should focus on improving allocation and implementation frameworks and procedures.

Improvements in tax administration should aim at reducing compliance gaps.

Design of reforms should include elements that help reduce resistance to reforms and build the support base for their successful completion.

43

Thank you