Economic UpdateThe Crisis Hits Home

Office of the Chief EconomistHuman Development Sector Management UnitPoverty and Economic Management Sector Management Unit

Europe and Central Asia RegionWorld Bank

Annual MeetingsIstanbul, October 2009

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Main points

Good news for enterprises, but foreign debt clouds the

future Industrial production stopped falling in mid-2009

But $350 billion of external debt due in 2010

Bad news for families as poverty and unemployment

rise, while household debt clouds the future Poverty will rise by almost 15 million instead of falling by 15 million in

2009

Stress tests indicate more debt distress likely for households in 2010

Tough times ahead for governments, and social

security debt clouds the future Fiscal deficits will rise from 1.5 to 5.5 percent of GDP in 2009

Stress tests indicate pension deficits rising to 5-6 percent of GDP

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Good news for enterprises, but foreign debt clouds future

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Industry has stopped shrinking

Developing

Industrial production, percentage change (saar)

Latin America

Europe & Central Asia

Source: World Bank, DEC Prospects Group.

South Asia

Middle-East & North Africa East Asia & Pacific

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Interest rates are lower

Emerging-market bond spreads have fallen but remain higher than pre-crisis levels

Source: World Bank, DEC Prospects Group

Before Lehman Brothers

Sovereign bonds(EMBI Global)

Corporate bonds(CEMBI Global)

Business regulations are better

Countries that made at least one positive reform in 2008 (%)

Leading Ten Doing Business Reformers in 2008

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1. Rwanda

2. Kyrgyz Republic

3. Macedonia, FYR

4. Belarus

5. United Arab Emirates

6. Moldova

7. Colombia

8. Tajikistan

9. Egypt, Arab Rep

10. Liberia

Source: World Bank, Doing Business 2009

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But debt obligations loom large

Source: World Bank, DEC Prospects Group

More than $350 billion of ECA’s foreign debt matures in 2010

Bad news for families as poverty and unemployment rise, while household debt distress clouds the future

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Poverty will rise

Source: World Bank Staff

Increases in poverty and vulnerability (change in people living on <$5/day)

This graph needs to be redone, with a stacked bar chart with bothPoverty (<$2.50) and vulnerability(2.50-5.00)

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Poverty will rise everywhere

Note: Estimates are not comparable across countries.Source: World Bank Staff

Share of households below national poverty lines

Most recent poverty estimate Forecasted poverty in 2009

Armenia 23.8 (2007) 29.7

Azerbaijan 10.8 (2008) 11.8

Bulgaria 9.7 (2007) 11.3

Latvia 19.8 (2008) 26.9

Romania 5.7 (2008) 7.4

Russia 13.5 (2008) 15.5

Tajikistan 53.1 (2008) 57.9

Turkey 17.4 (2008) 21.9

Note: Estimates are not comparable across countries

Most recent poverty estimate Forecasted poverty in 2009

Armenia 23.8 (2007) 29.7

Azerbaijan 10.8 (2008) 11.8

Bulgaria 9.7 (2007) 11.3

Latvia 19.8 (2008) 26.9

Romania 5.7 (2008) 7.4

Russia 13.5 (2008) 15.5

Tajikistan 53.1 (2008) 57.9

Turkey 17.4 (2008) 21.9

Note: Estimates are not comparable across countries

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Rising job losses

Source: World Bank Staff

Registered unemployment has risen in almost every country since mid-2008

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Job losses most in middle-income ECA

Source: World Bank Staff

Growth of unemployment rates, 2009 over 2008, percent

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Unemployment in Turkey has doubled

Source: World Bank staff

Registered unemployment in Turkey, February 2008 to August 2009

Incomes in Turkey have been falling

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Evidence from Turkey finds a particularly large hit to self employment income

Source: World Bank-UNICEF Survey

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The sources of household distress

Source: World Bank 2009: The Crisis Hits Home

Most recent poverty estimate Forecasted poverty in 2009

Armenia 23.8 (2007) 29.7

Azerbaijan 10.8 (2008) 11.8

Bulgaria 9.7 (2007) 11.3

Latvia 19.8 (2008) 26.9

Romania 5.7 (2008) 7.4

Russia 13.5 (2008) 15.5

Tajikistan 53.1 (2008) 57.9

Turkey 17.4 (2008) 21.9

Note: Estimates are not comparable across countries

Most recent poverty estimate Forecasted poverty in 2009

Armenia 23.8 (2007) 29.7

Azerbaijan 10.8 (2008) 11.8

Bulgaria 9.7 (2007) 11.3

Latvia 19.8 (2008) 26.9

Romania 5.7 (2008) 7.4

Russia 13.5 (2008) 15.5

Tajikistan 53.1 (2008) 57.9

Turkey 17.4 (2008) 21.9

Note: Estimates are not comparable across countries

• Credit Market ShockFinancial Market

• Relative Price ShockProduct Market

• Income/Employment Shock

Labor Market

Shocks are transmitted to households through financial, product and labor markets

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Household stress tests show distress

Source: World Bank Staff

Severe Stress likely in Bosnia, Croatia, Estonia and Hungary

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10

20

30

40

50

I II III IV V ALL I II III IV V ALL I II III IV V ALL I II III IV V ALL

Bosnia & Herzegovina Croatia Estonia Hungary

% of debt-holding households that are not vulnerable

% of debt-holding households that are vulnerable, prior to the simulation

% of debt-holding households that become vulnerable, as a result of the simulation

Debt repayment as a % of household income (median), prior to the simulation

Debt repayment as a % of household income (median), as a result of the simulation

Tough times ahead for governments, and pension debt clouds the future

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Rapid fiscal deterioration in 2009

Source: World Bank Staff

Central and Eastern European government accounts were hit sooner

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-5

-4

-3

-2

-1

0

1

2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Balance (% GDP), 2000-2010

CEE + Turkey CIS

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Social protection spending

ECA spends a lot on public pensions (percent of GDP)

Source: World Bank staff estimates and OECD Social Expenditure Database. Most data from 2000 to 2003.

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Good coverage of social assistance

Source: World Bank Staff

Is lowest in ECA’s poorest countries, but compares favorably with other regions

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And reasonable targeting

Source: World Bank Staff

Not all goes to poor, but accuracy compares favorably with programs in other regions

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Reforms needed for social security

Source: World Bank staff

The reforms that help the most are inflation indexing and higher retirement ages

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Crisis is not over. Countries in Emerging Europe and

Central Asia face a slow recovery No green shoots for workers

Tighter money ahead. Post-crisis growth will likely be

lower, and fiscal deficits higher Smaller budgets for governments

Fiscal consolidation, not indiscriminate cuts. More

efficiency of spending can mean more growth and

more equity

Better prospects for both families and firms

Messages

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How the World Bank is helping

Supporting budgets Increased lending (IBRD/IDA): $3.8bn in 2007, $4.2bn in 2008, $9.3bn in 2009

Operations in Armenia, Bulgaria, Georgia, Hungary, Latvia, Poland,

Romania, Serbia, Tajikistan, Turkey, and Ukraine

Strengthening institutions Helping countries such as Belarus, FYR Macedonia and Turkey improve

social assistance programs

Helping middle income countries strengthen banking systems

Helping all countries improve social service delivery mechanisms

Improving policies Public expenditure reviews, e.g., in Poland, Lithuania, Russia, and Latvia to

identify areas for efficiency

Economic reports, e.g., in Croatia and Central Asia to strengthen integration

in Europe and Eurasia

More information

World Bank, 2009: The Crisis Hits Home: Stress Testing Households in Europe and Central Asia, Report No. 50158-ECA.

bquillin@worldbank.org kschrader@worldbank.org

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