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