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The Global and Serbia’s Economy Lecture at the Economic Faculty Belgrade, May 22, 2012 Bogdan Lissovolik IMF Resident Representative for Serbia Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy? Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy? WHAT IS IMF ? GLOBAL MEMBERSHIP 187 COUNTRIES REPRESENTED NON-MEMBERS INCLUDE: CUBA, NORTH KOREA, ANDORRA, MONACO, NAURU, LIECHTENSTEIN MANDATE: GLOBAL ECONOMIC & FINANCIAL STABILITY SHORT-TERM BALANCE OF PAYMENT SUPPORT FACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOME PILLAR OF MULTILATERALISM PROMOTES ECONOMIC COOPERATION COMPLEMENTS THE UN, WORLD BANK, WTO & ILO Where are we? Output Growth, 2011Q4 Where are we? Public Debt (% of GDP) Where are we? 10-Year Government Bond Yields Where are we? Capital Flows to Emerging Markets and Developing Economies Greece Crisis ($US billion; weekly) Ireland Crisis ECB LTRO Where are we? Unemployment rates Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy? Where are we going? Output Growth, 2012-13 Where are we going? The Brakes: Fiscal Consolidation (change in the structural balance; percentage points of potential GDP) Where are we going? The Brakes: Bank Deleveraging Projected Fall in Bank Lending Supply, 2012-13 Effect of Deleveraging on Output Level (% deviation from no-deleveraging scenario) What Are The Drivers Of Bank Deleveraging? Structural drivers… • Balance sheet clean-up and shedding of legacy assets • Better capitalization • Reduce reliance on less stable funding sources . . . shaped by cyclical financial and macro conditions • Under adverse conditions capital generation more difficult • Funding pressures could also place strains on banks 10 Where are we going? Real GDP Growth Advanced Economies Emerging and Developing Economies Sept. 2011 WEO Sept. 2011 WEO Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy? What are the risks? RISK 1: Euro Area Crisis RISK 2: Oil Prices What are the risks? GROWTH vicious cycles FISCAL BANKS What are the risks? GROWTH vicious cycles FISCAL BANKS Exports of Goods to the Euro Area Euro Area Bank Claims (2010) (% of GDP; Sep. 2011) SSA Adv. Asia MENA CIS LAC USA+ CAN Emerging Europe Other Adv. Europe USA+CAN Adv. Asia LAC Dev. Asia SSA MENA CIS Other Adv. Europe Emerging Europe Euro Area What are the risks? What are the risks? RISK 1: Euro Area Crisis RISK 2: Oil Prices What are the risks? WEO Downside Scenario for a Disruption in the Global Oil Supply (% deviation from WEO baseline) What are the risks? WEO Downside Scenario for a Disruption in the Global Oil Supply (percent or percentage point deviation from baseline) GDP Loss after Two Years Rise in Inflation after One Year Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy? What needs to be done? (policies) Well-coordinated policy package – in most countries Fiscal policies: gradual consolidation Monetary and liquidity policies should continue to be accommodative, if possible Macro-prudential policies need to be strengthened Structural reforms to boost long-term productivity and employment Support for the unemployed (social policies) More international coordination of macro-financial policies Strengthening the global firewall What needs to be done? (policies) Fiscal policy Fiscal adjustment should proceed at a steady pace (if there is fiscal space); not too fast not too slow Implementation of a clear medium-term fiscal adjustment plan is a key requirement for sustainable growth, with support of fiscal institutions Growth enhancing measures are very important for the fiscal accounts! Challenges: Secure adjustment/reform without immediate market/political pressure Difficult dilemma if there is not fiscal space – no access to borrowing with high deficits… Fiscal consolidation: Goldilocks Principle: “Not too hot, not too cold, just right” – depends on the specific circumstances Insufficient adjustment could undermine fiscal credibility and lead to fiscal crises, which would be bad for growth Too much fiscal adjustment could weaken aggregate demand, which would be bad for growth What needs to be done? (policies) Monetary policy Monetary and liquidity policies should continue to be accommodative -- in most countries, especially as weak demand continues to kip a lid on inflation; Challenges: When and how to tighten monetary policy? – some program are time-limited If inflation re-emerges while financial system/recovery is still fragile -- a difficult trade-off… Restructuring central bank balance sheets after unconventional policies How to respond to the oil shock? What if fiscal consolidation sputters? How to communicate to anchor expectations? The challenge of unbalanced external position and foreign currency dominance in emerging markets – constrains scope for looser monetary policy. What needs to be done? (policies) Macroprudential policy Adequate financial regulation, supervision, capitalization, liquidity, and crisis-management frameworks. Challenges: How to reduce reliance on unstable funding sources? How to limit de-leveraging? How to deal with NPLs and legacy assets? How to regulate cross-border transactions? What needs to be done? (regions/countries) Euro Area Building a stronger currency union •Improved fiscal rules and institutions Strengthening banking systems What needs to be done? (countries/regions) Most Emerging Market and Developing Economies Rebuilding macroeconomic policy room Strengthening prudential policies and frameworks Promoting more inclusive growth What needs to be done? (countries) Economies with Large External Surpluses Fostering domestic consumption, including through more exchange rate flexibility Economies with Large External Deficits Developing a domestic policy mix to gradually rebalance toward a sustainable export-oriented growth, based on FDI and prudent macroeconomic policies Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy? The “old-model” problem… Still-large External Deficit Current Account Deficit (percent of GDP) 0 0 -5 -5 -10 -10 -15 -15 -20 -20 Serbia SEE /1 CEE 2/ -25 -25 2004 2005 2006 2007 2008 2009 2010 1/ Albania, Bosnia and Hercegovina, Croatia and Macedonia FYR. 2/ New EU-10 excluding the Baltics. 2011 And relatively high unit labor costs With real wage outpacing productivity And public debt becoming a problem 180 160 Figure 2. Public Debt in Selected Economies, 2011 (percent of GDP) 140 120 100 80 60 40 20 0 Sources: National authorities, IMF, and staff estimates 0 Sources: National authorities, IMF, and staff estimates Armenia Albania Macedonia Bulgaria Switzerland Romania Russia Slovak Republic Belarus Moldova Lithuania Latvia Croatia United States Luxembourg Estonia Spain Ireland Norway Poland Czech Republic Germany United Kingdom Serbia Iceland Slovenia Hungary Portugal Sweden Bosnia and Herzegovina Greece Italy Netherlands Austria Belgium Finland Denmark France Fueled by public spending 60 Figure 8. General Government Expenditure in Selected Economies, 2011 (percent of GDP) 50 sample average 40 30 20 10 18 14 12 10 0 Pakistan Indonesia India Thailand Mexico Korea Philippines South Africa Saudi Arabia Malaysia Iceland China Egypt Jordan Ireland Australia Canada Chile New Zealand Latvia Turkey United Kingdom Slovakia United States Netherlands Bulgaria Norway Argentina Luxembourg Romania Czech Republic Lithuania Denmark Russia Switzerland Brazil Spain Estonia Sweden Belgium Japan Slovenia Finland Germany Hungary Poland Greece Portugal France Austria Serbia Italy Ukraine With pension spending especially high 20 Figure 9. Pension Expenditure, 2010 (percent of GDP) 16 Pension expenditure Advanced countries (average) Emerging countries (average) 8 6 4 2 Sources: National authorities, IMF, and staff estimates What to do? ✤ 1. Fiscal consolidation through structural reforms of spending (pensions, wage bill) ✤ 2. Product market reforms ✤ 3. Labor market reforms Attract the right kind of FDI Gross FDI by branch of activity, million euro 5000 4000 3000 2000 1000 0 2004 2005 2006 2007 2008 2009 2010 Manufacturing Wholesale and retail trade, repair Transport, storage and communications Financial intermediation Real estate, renting and business activities Other 2011* Reform severance benefits Thank You