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RUSSIAN ECONOMIC REPORT #18 Refocusing policy on households Klaus Rohland Country Director for Russia Friday, April 3, 2009 Presentation at German Embassy Moscow Russia, Russia I. Worst global crisis since WWII II. Recent developments in Russia III. Fiscal policy response I. The worst global crisis since WWII • Global demand, output, trade, industrial production (especially manufacturing), capital flows collapsing around the world since November 2008 • Highly synchronized, global crisis • Trends continue in early 2009 Industrial Production, annual % change 3-month moving average, seasonally adjusted 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 Developing Countries High Income Countries Sources: IMF, Datastream Thomson and World Bank 2009M1 2008M10 2008M7 2008M4 2008M1 2007M10 2007M7 2007M4 2007M1 2006M10 2006M7 2006M4 2006M1 2005M10 2005M7 2005M4 2005M1 Russia Global Economic Outlook for 2009-10: Grim • Real GDP growth • • • • World trade • • • -1.7% (2009) +2.3% (2010) (recovery possible but uncertain) High-income countries about -2.9% (2009) and developing countries +2.2% (2009), major downward revisions from previous forecasts -6.1% (2009) +3.9% (2010) Oil prices • • USD 47.8 (2009) USD 52.7 (2010) [ Urals: $45 ] [ Urals: $45 -$48] Capital flows to developing countries drying out, oil prices likely to remain low Gross capital flows to emerging markets and Russia billion US dollars 200 70 60 *Jan-2009 on quarterly bas is 150 50 40 100 30 20 50 10 Banks (left axis) Bonds (left axis) 2009-Q1* 2008-Q4 2008-Q3 2008-Q2 2008-Q1 2007-Q4 2007-Q3 2007-Q2 - 2007-Q1 - Equities (left axis) Russia-total inflows (right axis) Sources: Dealogic and W orld Bank World Bank oil price forecast 115 Nominal price of average crude (Brent, Dubai and WTI), simple average, $/bbl 100 96.99 85 70 71.12 55 52.71 47.79 40 25 2007 2008 2009 Source: W orld Bank 2010 II. Recent Developments:Russian economy is hard hit Table 1.1: Main macroeconomic indicators, 2003-08 2006 2007 2008 IV Q 2008 Jan-09 Feb-09 GDP growth, % 7,7 8,1 5,6 1.1*** -8.8* -7.3* Industrial production growth, y-o-y, % 6,3 6,3 2,1 -6,1 -16,0 -13,2 Fixed capital investment growth, %, y-o-y 16,7 21,1 9,8 -2,3 -15,5 -14,1 Federal government balance, % GDP Inflation (CPI), % change , e-o-p 7,4 9,0 5,5 11,9 4,0 13,3 4,0 13,3 15,0 2.4** 2,6 4.1** Current account, billion USD 95,6 76,6 98,9 8,1 n/a n/a Unemployment, % Memo: Oil prices, Urals (USD/barrel) 7,2 61,2 6,1 69,5 6,3 95,1 7,1 54,9 8,1 44,2 8,5 43,1 Reserves (including gold) billion USD, e-o-p 303,7 478,8 427,1 427,1 386,9 384,1 Source: Rosstat, CBR, Ministry of Finance, Bloomberg * Preliminary estimate by ministry of economy ** Cumulative from end 2008 *** Preliminary estimates by the WB staff Why was the impact on Russia so strong? • • • • • Dependence of the economy on – Oil prices – Capital inflows – External borrowing by banks and enterprises Small size of the small and medium size enterprise sector Narrow economic structure Low competitiveness Unexpectedly strong drop in world demand Demand sources of Russia’s growth (in percent) 14.00 12.00 10.00 8.00 6.00 4.00 2.00 (2.00) (4.00) (6.00) 2007 Q3 2007 Q4 Consumption 2008 Q1 2008 Q2 Investment 2008 Q3 2008 Q4 Net Exports 2009 Q1* Growth Across-the-board, general slowdown, then deep recession in 2009 • Both tradable and non-tradable sectors accelerated their slowdown in Q4 with industry and manufacturing registering sharp decline in final months of 2008 • Dramatic deterioration in early 2009. – Construction: -18.8% in January-February ’09 – Transport: -18.2% in January-February ’09 – Retail trade: +3.1 percent in January, but -2.4% in February 2009 – Manufacturing: -24.1 percent in January 2009, -18.3 percent in February. The most significant decline was registered in production of electro-technical and optical equipment (-46.6%), other non-metal products (-33.3%), and transport and transportation equipment (-31%). Labor markets—adjusting rapidly Table 1.3.Labor productivity, Disposable Income, Wages, and Unemployment GDP growth, %, y-o-y Total employment, million people 2006 7.7 68.8 2007 8.1 70.5 2008 5.6 71 Q4 2008 1.1** 70.6 09-Jan -8.8* 69.6 09-Feb -7.3* 69.2 Employment growth, %, y-o-y 0.8 2.4 0.6 -0.3 -0.4 -0.4 Labor productivity growth, %, y-o-y 6.8 5.6 5 1.4 n/a n/a Real disposable income growth, %, y-o-y 13.5 12.1 2.7 -5.8 -10.2 -4.7 Real wage growth, %, y-o-y 13.3 17.2 10.3 5 1.9 0.1 Average monthly wage, USD 392 532 694 668 544 524 Unemployment (%, ILO definition, e-o-p) 7.2 6.1 6.3 7.1 8.1 8.5 Source: Rosstat. * - preliminary estimate of the Ministry of Economy ** - preliminary etimate by the WB staff Balance of payments—weakening due to terms of trade shock and capital outflows Table 1.4 Balance of payments (USD billions) Current Account Balance Trade Balance Capital and Financial Account Errors and Omissions Change in Reserves (+ = increase) 2006 2007 2008a 94.5 139.2 11.9 1.1 107.5 76.2 130.9 85.9 -13.2 148.9 98.3 176.6 -128.4 -15.8 -45.3 Source: CBR. a. Preliminary estimates. Table 1.5. Net capital flows (USD billions), 2006-08 Total net capital inflows to the private sector Net capital inflows to the banking sector Net capital inflows to the non-banking sector Source: CBR. a. Preliminary estimates. 2006 41.9 27.5 14.4 2007 81.2 45.9 35.4 2008 -129.9 -57.5 -72.5 4Q 2008a -130.5 -56.2 -74.3 Monetary-Exchange and Fiscal policy—aiming to limit the impact of the crisis Table 1.6. Consolidated budget of the Russian Federation General Government (consolidated budget) % of GDP 2005 2006 2007 Revenues Expenditure Balance (surplus/deficit) Non-oil balance Primary non-oil balance Financing Drawdown from reserve fund Domestic borrowing Memorandum item Stabilization funds /1 39.7 31.5 8.1 -2.1 -1 - 39.7 31.3 8.4 -2.6 -1.8 - 40.2 34.1 6.1 -2.7 -2.2 - 2008 38.5 33.7 4.8 -5.8 -5.3 - 5.6 8.7 11.7 - Reserve fund /1 National welfare fund 1/ - - - 9.7 6.2 Source: Ministry of Finance; preliminary; World Bank estimates. 1/ End-of-period stock. 2009 24 32 -8 8 7 1 Percentage point change in GDP over previous year 2008 2009 -1.7 -14.5 -0.4 -1.7 -1.3 -12.8 Outlook for Russia, 2009-10 Table 1.7. Outlook for 2009-2010 World growth, % Oil prices, Urals, USD/brrl GDP growth, % Federal government balance, % Current account, USD bln. Net capital outflows, USD bln. Source: World Bank projections. 2009 -1.7 45 -4.5 -7.4 31 170 2010 2.3 45 0.0 -6.0 16 90 Fraternal twins: Russia’s two crises 1997-98 and 2008-09 Box figure 1. Quarterly growth rate (year-on-year) in percentage, 1997–99 vs 2007–09 21 15 1999 Q4 1999 Q3 16 11 10 5 2007 Q4 2008 Q1 1999 Q2 2008 Q2 6 1997 Q4 2008 Q3 0 1998 Q2 1999 Q1 1998 Q1 2008 Q4 1 -5 2009 Q3 1998 Q4 2009 Q1 1998 Q3 -4 -10 2009 Q4 2009 Q2 -9 -15 2008-2009* (Left Axis) Box figure 2. Quarterly growth of investment in percentage, 1997–99 vs 2007–09 55 45 1998-1999 (Right Axis) Box figure 3. Quarterly growth of net exports in percentage, 1997–99 vs 2007–09 35 300 25 250 15 200 5 150 -5 100 -15 50 300 1998 Q4 250 1999 Q4 35 25 1999 Q3 2007 Q4 200 1999 Q1 1998 Q3 150 2008 Q1 15 1997 Q4 5 1999 Q2 2008 Q2 1998 Q1 1998 Q2 1998 Q3 1999 Q1 2008 Q3 2008 Q4 100 1999 Q2 1999 Q3 1998 Q2 -5 1998 Q4 0 2009 Q4 2009 Q1 -15 -25 2009 Q3 2009 Q2 1997 Q4 1998 Q1 2008 Q3 2007 Q4 -35 -50 2008 Q4 50 2009 Q3 2009 Q1 0 2009 Q2 -50 2008 Q1 2008 Q2 -25 -45 2008-2009* (Left Axis) 1998-1999 (Right Axis) -100 -100 2008-2009* (Left Axis) 1998-1999 (Right Axis) III. FISCAL POLICY RESPONSE—initially supporting banks and enterprises Table 2.1. Summary of fiscal anti-crisis measures—introduced in 2008 and announced for 2009 Billions of rubles 2008 Strengthening the financial sector 785 Supporting the real economy 304 Protecting the vulnerable Transfers to regions Total 1089 % of GDP 2.62% 2009 Total 625 798.3 111.5 300 1834.77 4.07% 1410 1102.3 111.5 300 2923.77 6.69% Total as a share of GDP 3.28% 2.50% 0.25% 0.67% 6.69% Distribution of each policy measure as percentage of total 2008 2009 Total 72.08% 27.92% 0.00% 0.00% 100.00% 34.06% 43.51% 6.08% 16.35% 100.00% 48.23% 37.70% 3.81% 10.26% 100.00% Source: World Bank staff estimates, Government of Russia Note: Excludes quasi-fiscal and monetary measures, state guarantees in the amount of 300 billion rubles planned for 2009, measures that were planned before the crisis, such as increase in the minimum wage and indexation of pensions, as well as external crisis related lending to CIS countries and Mongolia. Fiscal support to the financial system Fiscal measures aimed at the financial system—introduced in 2008 and announced for 2009 Billions of rubles Recapitalization and other direct support Recapitalization of Deposit Insurance Agency Recapitalization of AHML1 Recapitalization of banks Recapitalization of Rosagrolizing Subordinated loans2 Total 2008 2009 Total Total as a share of GDP Distribution of each policy measure as percentage of total 2008 2009 Total 335 70 405 0.96% 42.68% 11.20% 28.72% 200 60 75 0 450 785 0 0 45 25 555 625 200 60 120 25 1,005 1,410 0.48% 0.14% 0.28% 0.06% 2.31% 3.28% 25.48% 7.64% 9.55% 0.00% 57.32% 100.00% 0.00% 0.00% 7.20% 4.00% 88.80% 100.00% 14.18% 4.26% 8.51% 1.77% 71.28% 100.00% Supporting the real economy––using direct support and easing the tax burden Table 2.3. Summary of “fiscal stimulus” measures aimed at supporting the real economy––introduced in 2008 and announced for 2009 Amount in RUR (billions) Fiscal stimulus aimed at firms Sector specific support1 Small and medium enterprises2 Export industries Decrease in tax burden3 Fiscal stimulus aimed at households Purchase of housing units for military and vulnerable groups Labor market policies (including an increase in unemployment benefits) Fiscal stimulus aimed at regions Total Total (as a share of GDP) 220 2009 763.27 276.67 6.2 6 474.4 Total 1,035.27 328.67 6.2 6 694.4 Total as a share of GDP 2.35% 0.74% 0.01% 0.01% 1.58% 32 146.5 178.5 0.40% 10.53% 12.11% 11.79% 32 35 67 0.15% 10.53% 2.89% 4.43% 111.5 300 0.25% 0.67% 9.22% 24.80% 7.37% 19.82% 304 0.73% 111.5 300 1,209.7 7 2.68% 1,513.77 3.42% 3.42% 100.00% 100.00% 2008 272 52 Distribution of each policy measure as percentage from total 2008 2009 Total 89.47% 63.09% 68.39% 17.11% 22.87% 21.71% 0.51% 0.41% 0.50% 0.40% 72.37% 39.21% 45.87% 100.00% Note: Excludes quasi-fiscal and monetary measures. In addition to fiscal measures to support firms that amount to more than 900 billion rubles in 2009, the government is planning to issue state guarantees of 300 billion rubles (not reflected in the budget). Some features of fiscal support to enterprises • • • • • Large emphasis on tax reduction Limited infrastructure spending Limited support to SMEs Limited interventions in the labor market Potential support to “strategic enterprises How does Russia’s fiscal stimulus compare with G-20 countries? Box Figure 1. Estimated size of fiscal stimulus Box Figure 2. Estimated size of fiscal stimulus and measures in G-20 countries growth deceleration in G-20 countries Turkey Italy Brazil India Argentina France Mexico United Kingdom Indonesia Japan Canada Russia South Africa Germany Australia Spain Korea United States China Saudi Arabia 0.0% Average annual growth deceleration in percentage points (2008-2010) 0.00% 2008 2009 2010 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 0.00% -0.50% Italy 0.50% Indonesia 1.00% Canada Mexico France Japan Brazil -1.00% Turkey 1.50% United States 2.00% Korea 2.50% AustraliaSouth Africa Germany India United Kingdom Spain -1.50% China -2.00% Argentina -2.50% Russia -3.00% Average annual size of fiscal stimulus as a percentage of GDP (2008-2010) Source: Data for non-Russia G-20 countries, IMF (based on packages announced through late February). The figures do not include (i) below-the-line operations, (ii) measures that were already planned for, (iii) banking-sector support measures. Estimates of planned expenditures for 2010 are not available for Russia, Argentina, India, Mexico, and South Africa. Social impact—spreading fast Figure 2.2 Projected loss of employment in Russia in 2009 0 2 0 100 Loss in employment, % change (top bar) 4 6 8 10 12 14 16 Manufacturing Construction Retail Agriculture Other 200 300 400 500 600 700 800 Loss in employment, thosands (bottom bar) 900 1000 Projected amount of poor people before and after the crisis (in millions), 2008-09 25.00 20.00 15.00 10.00 5.00 0.00 2008 2009 ADDITIONAL number of poor after the crisis Projected number of poor before the crisis What more can future policy do? • • Adjusting the Fiscal Policy Response––targeting households, infrastructure, and small and medium enterprises Additional package must be: – Fiscally affordable – Cost efficient in alleviating poverty – Possible to scale up through simple reforms – Compatible with existing level social safety net mechanisms Table 2.4. A social protection stimulus package of 1 percent of GDP, implemented in a period from April 2009 to March, 2010 could help move 4.1 million people out of poverty compared with a no-program scenario Cost of the program as a share of GDP Child allowance Low-end pensions Unemployment benefits Total Source : World Bank estimates. 0.28 0.59 0.14 1.00% Reduction in poverty rate, percentage points 0.8 1.8 0.3 2.9 Reduction in poverty, million people 1.13 2.54 0.42 4.09 The additional social package is constructed so as to maximize impact on poverty Figure 2.6. Impact on poverty reduction for a given increase in program budget 16.00% 15.50% poverty Rate 15.00% 14.50% 14.00% 13.50% 13.00% 12.50% 12.00% 0% 100% 200% 300% 400% 500% % increase in benefit Child allowances Pensions (lowest 30%) Unemployment benefits Source: World Bank staff estimates. What more? Additional modest support for infrastructure bottlenecks and SMEs • Supporting recovery and medium-term growth (0.5% of GDP): – Infrastructure bottlenecks – SMEs IN SUM, we propose in the short term: • Social protection package (1% of GDP) • Infrastructure and SMEs (0.5% of GDP) – Over April 2009-April 2010 period. – This could help the economy cushion the large social impact and prepare it for a more sustained economic recovery later on. Back to the future: Accelerating structural reforms • Even during the crisis, long-term structural reform agenda should not be forgotten. • Critical to long-term growth. • More competitive international business climate and fewer resources after crisis – – – – – – Banking sector modernization Public administration and governance reform Improving investment climate Infrastructure WTO agenda Improving effectiveness and targeting of the safety net DOWNSIDE RISKS FOR THE WORLD ECONOMY AND RUSSIA REMAIN • Social impact and associated social tensions, especially in select, vulnerable regions • Second round effect of real economy on financial sector • Prolonged depression of global demand • Therefore, policy must remain vigilant, flexible and ready to respond quickly to changing conditions. • THEREFORE, In a downside scenario, well designed and implemented public works programs may be needed. Thank you!