4. Exports and manufacturing are helped by a turn in the inventory cycle Industrial Production (Percent change; 3mma; annualized) Jul-09 Merchandise Exports (Percent change; 3mma; annualized) Jul-09
5. Consumer confidence is slowly recovering, but unemployment is still rising Consumer Confidence (January 2005=100) Aug. 09 Unemployment (Percent; weighted by labor force) Jul. 09
6. Good policies have removed the risk of another Great Depression, but financial conditions remain tight Corporate Spreads (Basis points; averages of Europe and United States) Interbank Spreads (Basis points) Equity Markets (March 2000 = 100; national currency) Sep. 09 08 06 04 02 2000 Sep. 09 08 06 04 02 2000 Sep. 09 08 06 04 2000 02
7. Expansionary monetary policy has been key, but will not prevent a credit crunch Credit Growth in Private Nonfinancial Sectors (q/q changes; billions of local currency) 04 2000 09: Q2 06 02 08 Bank Lending Conditions* 2000 02 04 09: Q3 06 08 *Percent of net respondents reporting a tightening in lending standards
8. Fiscal policy, too, has played a major role, but fiscal support will diminish Fiscal Balance (Percent of GDP) 90 1970 80 2000 10 90 1970 80 2000 10 Public Debt (Percent of GDP) 14 14
9. Global growth is expected to pick up in 2010, but the recovery will be slow Real GDP Growth 1 (Percent change from a year earlier) Prospects for World GDP Growth (Percent change) 1 Quarterly data through 2010 and annual data afterwards. 14 12 10 08 06 04 2000 02
13. CCA in the grip of the global crisis Per capita incomes are declining in the energy importing countries Global crisis hit the region in 2009; only a modest recovery is projected for 2010 Real GDP Growth (Annual change; percent) Gross National Disposable Income Per Capita 1/ (U.S. dollars) 1/ GNDI is defined as GDP + non-factor income + transfers.
14. Remittances down sharply Many migrants worked in the Russian construction sector A collapse in remittances affects household incomes Remittance Outflows from Russia to the CCA 1 (Percent change; year-on-year) Remittance Inflows (Percent change; year-on-year) 1/ Includes compensation of employees and migrants capital transfer.
15. Exports contracted sharply in 2009, but imports also falling Exports of Goods in U.S. Dollars (Percent; year-on-year) Imports of Goods in U.S. Dollars (Percent; year-on-year)
16. Net external demand is holding back growth in 2009, but contributes to 2010 recovery Net External Demand 1 (Annual change; in percent) 1 Exports minus imports.
18. Fiscal policy has been expansionary in 2009 Change in the Non-oil Primary Fiscal Deficit, 2009 (Percent of non-oil GDP)
19. Where debt levels were already high, donor support has helped to finance the fiscal stance 2009 increase in donor support expected to reverse in 2010 Some governments are constrained by already high debt levels Grants to Energy Importers (Percent of GDP) Public Debt (Percent of GDP)
20. Inflation is down sharply, but pressures may return in 2010 Inflation is down sharply from historical highs… … but commodity prices are on the rise again Consumer Price Index (Annual change; percent) Commodity Prices (Index 2008 = 100)
21. Currencies have depreciated ... … helping reverse competitiveness losses suffered in 2008 … . against the dollar, and energy importers’ currencies have caught up with the weakening ruble … Local Currencies Against the U.S. Dollar and Russian Ruble (Aug 31, 2008 – Aug 31, 2009; increase indicates appreciation) Real Effective Exchange Rate (Index Jan 2005 = 100; increase indicates appreciation)
22. Financial sectors are under stress, with NPLs set to rise further Nonperforming Loans (NPLs) (Percent of total loans)
23. In response, credit growth has slowed Credit boom has come to an abrupt halt Real lending rates are rising as inflation declines Credit to the Private Sector (Percent change; year-on-year) Real Lending Rate (Percent) 1/ Lending rate for Georgia is on loan flows for all maturities.
26. Full report and copy of the presentation: http://www.imf.org/yerevan What do you think? Make your point on the related blog: http://blog-imfdirect.imf.org Please visit the IMF’s website
It is a pleasure for me to be here today to present the Regional Economic Outlook (REO) of the IMF’s Middle East and Central Asia Department. This report is published twice a year – in May and in October.
Global activity is projected to decline by around 1 percent in 2009 before recovering gradually (by 3 percent) in 2010. But output gaps will continue to widen through 2010, implying a continued rise in unemployment. Turning around global growth calls for concerted policy actions to stabilize financial conditions and bolster demand. Stabilizing the financial system should include three key elements: supplying liquidity to the banking system; cleansing bank balance sheets of impaired assets; and recapitalizing viable banks, while resolving non-viable institutions promptly. Monetary policy should be eased further by reducing policy rates where possible, and central banks should continue to explore unconventional measures to stimulate activity. Given large output gaps, fiscal stimulus should be sustained at least through 2010, anchored in credible medium-term fiscal frameworks.
The current recovery is largely driven by policy stimulus and a turn in the inventory cycle. A major contributor to growth has been restocking of inventories – reflecting this, export growth and industrial production rebounded in 2009 Q2.
Consumer confidence continues to recover, but given large output gaps, unemployment continues to rise (particularly in advanced economies). Unemployment in advanced economies will rise through much of 2010, reaching close to 10 percent.
While interbank and corporate spreads have recovered to near pre-crisis levels, the recovery in financial conditions remains dependent on public support. Bank lending remains strained in many countries, and private securitization markets remain in a state of disrepair. Accordingly, policies to sustain credit – liquidity infusions, capital injections, and liability guarantees -- will continue to be needed in the period ahead. Central banks will eventually need to unwind their extraordinary liquidity and credit support, but may need to start tightening monetary stances before balance sheets are restored. For monetary policymakers, the main challenge is to get the timing and pace of tightening right. In advanced economies, central banks can (with few exceptions) maintain accommodative conditions for an extended period, as inflation will likely remain muted.
Expansionary monetary policy has been key to relaxing financial conditions. Rising unemployment and household balance sheet adjustments are likely to weigh on household consumption demand, dampening demand for private sector credit. Deleveraging pressures will remain a constraint on bank credit for some time. Reforms should be implemented that will forestall a replay of similar financial crises in the future. Regulatory reforms need to place intermediation and credit creation on a sound and sustainable footing.
Fiscal policy has played a major role in underpinning the recovery, considering that conventional monetary policy has been constrained and less effective than usual, but fiscal support will diminish going forward. Under unchanged policies, public debt in advanced economies will rise from about 80 percent of GDP at end-2008 to reach over 110 percent of GDP in 2014. This implies a gradual rise in the cost of borrowing, particularly sovereign borrowing.
Overall: The global crisis has severely impacted the CCA. The energy importers, however, are facing negative growth rates and deteriorating living standards as a result of a sharp drop in remittances from Russia. Still, most energy exporters have weathered the global downturn reasonably well and are projected to record solid growth in 2009, given limited linkages to international markets, long-term energy export contracts, and supportive policies. A modest recovery for the CCA as a whole is expected in 2010. Policymakers have responded to the downturn by easing fiscal and monetary policies and strengthening social safety nets. In the energy importers, where governments have little space to provide such measures, the donors, including the neighboring states of Russia and China, and the IMF have provided support. In 2010, where possible, fiscal policies should continue to be supportive of growth and prioritize social protection. Financial sectors across the region are under stress, most notably in Kazakhstan, where restoring financial health remains a priority.
CCA countries are heterogeneous as a group: Energy Exporters Most energy exporters have weathered the global downturn reasonably well, and are projected to grow strongly in 2010. Azerbaijan, Turkmenistan, and Uzbekistan are projected to grow by between 4 percent and 8 percent in 2009, despite a severe drop in exports. In these countries, all of which have ample public savings accumulated from previous boom years, growth has been supported mainly by public spending. The exception is Kazakhstan, which, despite a large publicly financed anti-crisis program, is facing a contraction of real GDP by 2 percent, in part driven by a banking crisis. Outlook for 2010: the energy exporters are expected to benefit from the recovery of energy demand, and growth should range from 2 percent in Kazakhstan to 15 percent in Turkmenistan. Energy Importers Energy importers have been severely hit by the global downturn, largely due to economic linkages with Russia. Examples: Output in Armenia will fall more sharply than in other countries (roughly 15 percent in 2009), it also grew faster in previous years, fueled by an inflow of remittances and a construction boom. Looking at the last five years as a whole, including this year’s downturn, its cumulative growth performance remains somewhat stronger than that of the other energy importers. Examples: Tajikistan, on the other hand, may achieve a modestly positive growth in 2009, driven by a re-orientation of agricultural output from cotton to cereals and animal husbandry and a marked diversification away from imports. Outlook for 2010: On a positive note, recent data suggest that the downturn in energy importers may bottom out during the second half of 2009, and modest growth should return in 2010 in the range of 1–3 percent. The fall in output combined with declining remittances and depreciating exchange rates has resulted in a 20 percent drop in per capita disposable income in the CCA energy importers, of which remittances account for a quarter, reversing recent gains in poverty reduction. Supplementary Information: NB: CIS economies are projected to contract by 7 percent in 2009, more than the average for the CCA energy importers. The expected recovery in 2010—with a projected growth of 2 percent—is in a similar range to the projections for the CCA energy importers, but lower than for the CCA energy exporters. Real GDP growth: annual change; percent 1 Reflects WEO data and includes Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Georgia and Mongolia, which are not members of the CIS, are included for reasons of geography and similarities in economic structure.
An important channel through which the global economic crisis has affected the region—both the energy importers, as well as some exporters (Azerbaijan and Uzbekistan)—is through a marked drop in remittances inflows. The rapid growth of remittances up to 2008 was closely correlated with developments in the Russian construction sector; for the Kyrgyz Republic, Kazakhstan’s construction sector was also of importance. Remittance outflows from Russia have declined by around 30 percent during the year to June 2009. With many migrants working in the Russian construction sector, the decline in remittances is highly correlated with activity in that sector. In turn, remittances inflows into Georgia, the Kyrgyz Republic, and Tajikistan—for which monthly or quarterly data is available—have contracted by 20 to 60 percent, although the rate of decline appears to have stabilized by mid-2009. These dramatic shifts have depressed domestic consumption and construction activity across the region, which were both buoyed by remittances in the run-up to the crisis. Outlook for 2010: Given the weak outlook for Russia, remittances are expected to stagnate and, thus, contribute little to the recovery in the CCA. With subdued prospects for the Russian economy, remittances are not likely to reach their pre-crisis levels for a number of years. CCA economies that were heavily dependent on migrant workers must, therefore, find ways to provide returning migrants with gainful employment. While this infusion of labor could provide growth opportunities, increased investment is needed to realize this potential. In the near term, however, returning migrants are likely to add to fiscal pressures. Governments must balance the need to provide adequate social safety nets (including training) with continued public infrastructure investments that complement private sector development.
In addition, all CCA countries are being affected by weak global demand. Exports of goods and services are set to decline by an estimated 26 percent in U.S. dollar terms in 2009 (an exception is Turkmenistan, where oil production volumes are rising). The energy and commodity exporters, of course, are particularly severely affected, as well as countries that rely heavily on exports to Russia, such as Armenia. Imports of goods and services are also expected to fall—on average by 10 percent—in 2009, driven by an income effect where remittances are declining, and facilitated by exchange rate depreciation. Outlook for 2010: Exports should recover across the region, especially in energy exporters, as global demand for fuel picks up. Imports are projected to rebound only modestly.
As a result, net external demand is likely to provide a growth impulse in the energy exporters in 2010. For the energy importers, these projections highlight the need to find domestic sources of growth for 2010.
Governments and central banks responded to the impact of the global crisis with a wide range of instruments. Expansionary fiscal and monetary policies have been pursued in 2009 Exchange rates in most countries (except Azerbaijan and Turkmenistan) have depreciated against the U.S. dollar.
Fiscal policy has been largely accommodative in 2009. All CCA governments are aiming for lower primary fiscal surpluses (energy exporters) or widening primary fiscal deficits (energy importers). The so-called automatic stabilizers (deterioration in the fiscal balance as revenue collection declines during a downturn or benefit and entitlement programs see spending rise) are being allowed to work. In addition, discretionary fiscal stimulus (difference between the automatic component in the weakening of the fiscal balance and the total weakening of the fiscal balance) is being provided in response to the crisis. Authorities in Armenia, Azerbaijan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan are providing a discretionary fiscal stimulus. In Georgia, the government followed an expansionary fiscal stance in 2008, and in Kazakhstan, quasi-fiscal measures—not captured in the estimations presented above—have been used to support the economy. Tax revenue as a percent of GDP is declining sharply in a number of countries, partly reflecting the impact of declining remittances on the tax base. Outlook for 2010: More fiscal stimulus may be needed in some countries. For example, Kazakhstan, the Kyrgyz Republic, and Turkmenistan are currently targeting additional fiscal stimulus in 2010. In the other CCA countries, governments are facing limited fiscal space—such as high debt levels and borrowing costs—which may constrain their ability to pursue countercyclical policy (Armenia, Georgia, and Tajikistan). Additional highly concessional donor financing will be needed in these countries.
Limited space for providing stimulus may be partly explained by emerging financing constraints and already high debt levels in energy importers. In 2009, donor support, including Russia, is helping finance widening deficits and social spending to alleviate the impact of the crisis. However, for 2010, grant support is projected to decline significantly in percent of GDP compared to 2009. Additional highly concessional donor financing will be needed in those countries where fiscal policy is expected to turn procyclical.
With the growth slowdown and inflation falling rapidly, central banks in Armenia, Azerbaijan, Georgia, Kazakhstan, and Tajikistan have pursued monetary easing through cuts in their main policy rates, and direct liquidity support to the banking sector. In some countries (Azerbaijan, Georgia, Kazakhstan, Tajikistan), the authorities have also lowered reserve requirements. However, the effectiveness of monetary policy in easing credit conditions has been limited, given the small size of financial sectors in the region, as well as highly dollarized balance sheets in some countries. At the same time, concerns over pressures on the exchange rate also constrained monetary policy, particularly at the initial phase of the crisis. Looking ahead, with international commodity prices and global interest rates poised to rise again, the scope for further easing of monetary policy may be limited.
By mid-2009, exchange rates in most CCA countries had depreciated against the U.S. dollar, following the Russian ruble. The exceptions are Azerbaijan and Turkmenistan, which maintain their peg against the U.S. dollar at the pre-crisis level. In turn, real effective exchange rates have also depreciated. While the depreciation has helped restore competitiveness, several countries (Armenia, Georgia, and Tajikistan) still face large current account deficits and high external financing needs that are only met through official financing, suggesting a need for greater exchange rate flexibility. In some cases, balance sheet dollarization may call for a gradual approach. Where banks have large exposure to unhedged foreign currency borrowers, a large depreciation could undermine asset quality and add to the already high stress in financial systems.
Financial sectors across the CCA are under pressure. For the CCA, nonperforming loans are increasing, and in some countries, capital adequacy ratios are weakening as slower economic activity and declining remittances are affecting profitability and incomes. In some countries with high loan dollarization (Armenia, Georgia, Kazakhstan, and Tajikistan), the depreciation of local currencies could further erode debtors’ ability to pay. Loan-loss provisions are depleting capital and restricting banks’ ability to extend new loans. The Kazakh banking sector is particularly hard hit by its balance sheet exposure to construction, real estate, and foreign exchange lending to unhedged borrowers, as well as by the burden of maturing external liabilities. The stress in the Kazakh banking sector has spilled over to the Kyrgyz Republic, which is dominated by subsidiaries of Kazakh banks (accounting for close to 50 percent of the loan portfolio). Supplementary Information: These vulnerabilities call for close monitoring of CCA financial systems as well as enhanced supervision and crisis preparedness. There are some indications that prudential standards, including on provisioning, are not always strictly enforced, allowing vulnerabilities to linger. Crisis-preparedness frameworks could be further developed by specifying the roles and responsibilities of the central bank and ministry of finance. Efforts under way to reform existing deposit insurance systems (Tajikistan) or fully capitalize the newly introduced deposit insurance systems (Kyrgyz Republic), should be pushed forward to strengthen confidence in the banking sector. In Turkmenistan and Uzbekistan, directed lending is holding back the development of still nascent banking systems.
Weakening asset quality is affecting private sector credit growth, and borrowing costs appear to be rising in some countries. In addition, slowing deposit growth and illiquid international funding markets (accessed mainly by Kazakhstan) are hindering credit growth.
The global economy appears to be emerging from its worst recession since WW-II. CCA energy exporters should benefit from the global recovery as oil demand picks up again. For the CCA energy importers, however, we don’t see sizable growth impulses coming from net external demand. As such, maintaining external stability while pursuing accommodative fiscal policy will be the key priority for the energy importers in 2010. These countries, however, will need additional highly concessional donor support to finance widening fiscal deficits. All countries in the region would benefit from greater exchange rate flexibility, but, the energy importers with their high current account deficits in particular need to bring about external adjustment. Financial sectors in the region have been strained by the global crisis, and the domestic downturns. Restoring financial sector health with be key to rekindling private sector credit growth. Enhanced regional cooperation can also raise medium-term growth. CCA governments and central banks also need to start thinking about exit strategies from their accommodative policies. As they withdraw stimulus, it will be important that they push ahead with structural reforms to strengthen business and investment climates. In particular, financial sector development will be key to enable high and sustained private sector led growth.
The full report is available on the IMF’s website (www.imf.org) Precise location: http://www.imf.org/external/pubs/ft/reo/2009/MCD/eng/mreo1009.htm Today, we are also launching a one-week REO-related blog (October 11-17) at the following link: http://blog-imfdirect.imf.org -- we invite you to participate and look forward to your comments!