Global Headwinds Pose Risks for Black Sea Region

By Rachel Ziemba, Director of Emerging Europe and
Global Macro

© Roubini Global Economics Copyright 2011
No reproducing or redistribution without written consent. Roubini Global Economics
roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800

Global Headwinds For the Black Sea Region
• 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

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Global Growth: DM Stall, EZ Recession , EM Slowdown
Growth Inflation
2012 2013 2012 2013
U.S. 2.2 1.6 2 1.8
EZ -0.4 -0.6 2 1.7
Japan 2.1 1.1 0.1 -0.4
China 7.6 7.4 2.8 2.4
G7 1.4 1.0 1.9 1.6
Advanced Economies ₁ 1.2 0.8 1.8 1.5
Emerging and Frontier Markets 5.1 5.2 5.0 4.7
Asia/Pacific ₂ 5.4 5.4 3.2 2.9
Emerging Asia ₃ 6.2 6.3 3.9 3.5
Latin America 6 3.4 3.6 8.5 7.8
Emerging Europe 5 2.8 3.0 5.8 6.1
Middle East and Africa 6 3.4 3.3 5.8 6.2
BRIC 6.1 6.5 4.4 4.2
World 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 Australia
4. 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

Based on IMF PPP Weights for 2011 and 2012


Buying Time… But will Policymakers Respond Enough
• 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.


EM Europe: Balance Sheet Vulnerabilities
• 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


Effect on Black Sea
– 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.


Emerging Europe/CIS Growth Slowing Down
Growth Falling or Staying Below Trend
OECD Leading Indicators Point to
Slowdown

106
104
102
100
98
96
94
92
90
Jul-2007 Jul-2008 Jul-2009 Jul-2010 Germany
Czech Republic Jul-2011
Hungary Poland


How Much Policy Space
• 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.


Balance Sheet Repair Is Underway
External 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)
of which % FX credit in
total lending
Total pvt sector
Corp. HH /2
Bulgaria
44.7 34.7 10.0 61.9
Georgia
20.2 … … 74.3
Romania
24.9 12.4 12.5 62.5
Russia 9.1 8.3 0.7 20.3
Turkey 14.9 … … 27.8
Ukraine
31.8 19.1 12.7 46.3


Black Sea Region: Still Scope to Improve
Region: EM Eur
CIS Jun-12 Bulgaria Russia Ukraine Romania Turkey Georgia Average Greece Average
Scores
First pillar: External adjustment capacity 6.8 7.3 3.6 6.9 5.7 5.304413 5.9 3.524465 5.9
Second pillar: Institutional robustness 7.8 6.8 5.6 7.7 5.7 5.731839 6.6 4.663801 6.9
Third pillar: Medium term growth potential 4.0 4.6 4.6 4.0 5.2 5.204191 4.6 3.436175 4.7
Fourth pillar: Social inclusion 6.8 5.5 6.0 6.0 6.1 6.81744 6.2 7.651164 6.7
Sovereign Risk Index 7.3 7.1 4.6 7.3 5.7 5.518126 6.2 4.094133 6.4
Total Indebtedness Indicator 7.7 9.2 7.7 9.4 8.6 8.913358 8.6 0.977564 7.7
Vulnerability to Outflows 7.9 8.5 5.7 7.8 4.9 5.530949 6.7 3.369701 6.9
Government Stimulus Ability 7.7 7.8 5.3 7.7 6.2 7.098906 6.9 3.080888 6.8
Economic Flexibility 5.1 5.6 4.1 5.3 4.7 5.552529 5.1 3.507896 5.3
Political Risk Indicator 5.6 2.7 5.0 5.3 3.9 4.002652 4.4 5.291576 5.4
Business Environment 5.2 2.3 2.3 5.2 4.6 7.261583 4.5 5.046362 4.7
Property Rights and Corporate Governance 4.1 3.5 3.5 4.6 4.6 4.002652 4.0 5.291576 4.7
Innovation Capacity Indicator 3.0 4.5 3.5 2.5 3.5 2.489073 3.3 3.350159 4.4
Multi-Dimensional Poverty Indicator 8.4 7.0 7.2 7.3 7.7 7.974089 7.6 9.466624 8.0
Trade Vulnerability 6.5 1.2 5.6 8.6 9.6 5.234861 6.1 8.009526 7.4
Quality of Governance 5.6 2.6 2.8 5.6 5.7 5.263814 4.6 6.621294 5.5
Quality of Infrastructure 7.5 7.1 6.8 6.4 7.6 6.528074 7.0 8.095992 7.3
Telecom Infrastructure 9.8 9.6 7.8 9.5 8.2 4.942433 8.3 9.708871 9.4
Utility Infrastructure Indicator 7.9 7.1 7.7 5.6 8.4 8.70372 7.6 8.774535 7.8
Transport Infrastructure Indicator 4.8 4.5 4.9 4.1 6.2 5.938068 5.1 5.804571 5.0
Social, Institutional and Regulatory Risk 5.1 2.8 3.4 5.2 4.7 5.350367 4.4 5.452869 5.0


Country by country: Medium-Term Challenges
• 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


Long-term positives
• 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,


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