Download 18-5-2012_Francesco_CONTESSO

3rd Bank of Greece Workshop on the Economies of
Eastern European and Mediterranean Countries
Athens, 18 May 2012
The implications for the real
sector and the long-run
growth prospects of SEE
Francesco CONTESSO
Advisor
European Commission
DG Economic and Financial Affairs
Directorate D: International economic and financial relations, global governance
1
Outline
1. WB’s recovery from the 2008 financial crisis
2. The importance of the EU market for the WB
3. The impact of the euro-area sovereign debt
crisis
4. Prospects and conclusions
2
1. WB’s recovery from the 2008
financial crisis
3
Pre-crisis growth
patterns (2000-2008)
1.
2.
3.
4.
5.
High real GDP growth (5-7% on average)…
…boosted by strong credit growth and domestic
demand as well as pro-cyclical fiscal policies…
…with strong reliance on external public and
private financing, both in the form of FDI and
foreign debt...
…leading to high domestic and external
imbalances (large trade and current account
deficits)…
…and strong investment growth in the nontradable sectors rather than in tradables.
4
Vulnerabilities and crisis impact



High dependence on foreign financing made
countries vulnerable to risk of reversal
 crisis led to lower capital inflows and
slowing credit activity and deleveraging
Foreign savings were mainly used to finance
domestic consumption smoothing
 crisis led to sharp falls in domestic
demand
Capital allocation biased towards nontradable sector (construction, retail, financial
sector)
 crisis led to sharp real sector adjustments
and output losses
5
Impact of 2008 crisis and recovery…

Uneven impact
across the
countries…
 Three main
channels:




Trade
External financing
Remittances
Relevance of EU
integration?
%
GDP (annual growth rates)
14
HR
FYROM
ME
SR
10
6
2
-2
-6
2006
%
2007
2008
2009
2010
2011
GDP (annual growth rates)
9
AL
BH
KS
6
3
0
-3
2006
2007
2008
2009
2010
2011
6
Economic linkages of WB with EU (1)

High degree of trade
integration, but
differences across
countries
 Remittances play a
particular role in many
countries
%
80
International trade in goods with the EU, 2010
(% share in total country exports and imports)
Exports
Imports
ME
SR
ME
SR
60
40
20
0
AL
BH
FYROM
HR
KS
Remittances, 2010
(in per cent of GDP)
%
20
15
10
5
0
AL
BH
FYROM
HR
KS
7
Economic linkages of WB with EU (2)
Share of EU in total FDI stock
(2007-2010)
%

Strong financial
integration
 Foreign ownership
 Important for stable
financial sector
 But potential funding
risks (not part of this
presentation)
100
80
60
40
20
0
AL
FYROM
HR
KS
ME
SR
8
3. The impact of the euro-area
sovereign debt crisis
9
First signs of adverse impact on real output…
%
GDP growth (% change, yoy)
10
5
0
-5
HR
FYROM
SR
EA
-10
2008
2009
2010
2011

Deceleration of growth since the second half of
2011
 Croatia remains in recession
10
…exports on a downward trend…
Exports of goods (Jan 2008=100 index)

All countries in the
region experience
drop in exports
 Clearly indicating loss
in external demand
 Only partly “price”driven
150
125
HR
SR
400
FYROM
M E, r.sc.
300
100
200
75
100
50
0
2008
2009
2010
2011
2012
Exports of goods (Jan 2008=100 index)
205
170
135
100
65
AL
30
2008
2009
2010
BH
2011
KS
2012
11
…imports still not affected much…
Imports of goods (Jan 2008=100 index)

Imports have been
stable throughout
2011
 Partly driven by peaks
in commodity prices
in the first half
 …and domestic
demand
140
HR
FYROM
SR
ME
100
60
20
2008
2009
2010
2011
2012
Imports of goods (Jan 2008=100 index)
100
75
AL
BH
KS
50
2008
2009
2010
2011
2012
12
…industrial production is falling …
Industrial Production (Jan 2008=100 index)

Sharp drop of
industrial production
by the end of 2011
 Most affected
countries:
BH, FYROM, SR
 HR rather stable
 In all countries,
industrial production
is below pre-crisis
levels
130
100
70
HR
F YR OM
M E*
40
2008
2009
2010
2011
2012
* Only manufacturing
Industrial Production (Jan 2008=100 index)
115
100
85
BH
SR
70
2008
2009
2010
2011
2012
13
…employment growth turns negative in
some countries…

In HR and SR,
employment declines
since 2009
 In most other countries,
employment declines in
2009-2010
 Temporary recovery in
2011
 Again deterioration in
late 2011 and 2012
%
Employment growth (% change, yoy)
10
5
0
-5
AL
BH
SR
-10
2008
%
2009
2010
2011
Employment growth (% change, yoy)
8
4
0
-4
-8
F YR OM
ME
HR
-12
2008
2009
2010
2011
14
4. Prospects and conclusions
15
Outlook is towards slow recovery…
Spring 2012 Commission Forecast (11 May 2012)

After a weak first half year economic activity will gain
momentum in second half of 2012.
 Underlying factors:
- Decelerating and uncertain global growth
(China, USA, Japan)
- High energy prices
- Need to rebalance public finances and financial sector
weighs on growth in some Member States
 EU: zero growth in 2012, 1¼ % in 2013
EA: -¼ % in 2012, 1% in 2013
16
Growth perspectives are uneven within EU…
Expansion/Contraction:
real GDP per capita, 2008-12
(cumulated growth rates)

Countries which relied on credit/debt financed growth suffer most
(EL, ES, PT, IT, SL, EE, LV)

Crisis-hit financial sectors are brakes on growth (IR, UK, FI)
17
EU as trend setter for Western Balkan

In general, the Western Balkan countries follow growth profile of their main trading
partner, the EU.

Main transmission mechanism: external demand, international (and domestic) financing
conditions

Outlook for HR and SR is more pessimistic than for FYROM and ME

HR and SR have higher exposure to trading partners with low growth,
are more dependant on foreign financing and suffer from delayed reforms
18
Unemployment likely to remain high …
Unemployment rates
% of GDP
35.0
30.0
25.0
20.0
15.0
10.0
2011
2010
2012
2013
Croa ti a
The former Yugos l a v Republ i c of Ma cedoni a
Montenegro
Serbi a

In most Western Balkan countries, unemployment is significantly higher than in EU

Low growth in 2012 will lead to stagnation in unemployment in 2012.

Stronger growth in 2013 should allow a reduction in unemployment

In FYROM and SR, unemployment will remain above 20% of labour force

High unemployment reflects structural weaknesses and high informal sector
19
External imbalances persist …
Current Account Balances
% of GDP
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
2010
2011
2012
2013
Croa tia
The former Yugos l a v Republ i c of Ma cedoni a
Montenegro
Serbi a

Overall, external imbalances are likely to remain. Lower export growth is largely
offset by lower domestic demand (low wage growth, restrained investment)

In ME and Serbia, current account deficits are expected to remain high
Financing depends largely on FDI inflows and transfers

In FYROM and HR, current account deficits are likely to increase slightly, but will
remain below 5% of GDP
20
Inflation likely to moderate in most Western Balkan
countries …
% yoy
12.0
Inflation (CPI)
10.0
8.0
6.0
4.0
2.0
0.0
2010
2011
2012
2013
Croa tia
The former Yugos l a v Republ i c of Ma cedoni a
Montenegro
Serbi a

After high, partly energy driven inflation, CPI increases are expected to remain
moderate in 2012 and 2013, benefitting from lower import prices

In ME, tax increases might raise inflation in 2012. In Serbia, after a peak in 2011,
lower energy prices and a strong anti-inflationary policy mix should contribute to CPI
increases below 5%
21
Public finances under pressure …
% yoy
0.0
Public Sector Deficits
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
2010
2011
2012
2013
Croa tia
The former Yugos l a v Republ i c of Ma cedoni a
Montenegro
Serbi a

In HR and SR, weak economic growth and a rigid spending structure are likely to
keep deficits close to -5% of GDP.

In FYROM, the government is expected to maintain its low deficit approach.

In ME, the authorities have announced a deficit reduction strategy, which should
bring the deficit below 2% in 2013.
22
Public debt likely to increase …
% of GDP
60.0
Public Sector Debt
55.0
50.0
45.0
40.0
35.0
30.0
25.0
20.0
2010
2011
2012
2013
Croa tia
The former Yugos l a v Republ i c of Ma cedoni a
Montenegro
Serbi a

Low growth and persistent deficits are likely to raise debt levels.

In HR and SR, debt levels are approaching the 60% mark.

In ME, the policy of decreasing deficits should lead to a reduction in the debt ratio
by 2013.

In FYROM, increased reliance on foreign credits will lead to a continued increse in
the debt level.
23
Prospects and conclusions



Main transmission mechanism of sovereign-debt crisis to
the Western Balkan are lower exports and in particular
more constrained access to (foreign) financing.
This puts in question the Western Balkan growth model,
which strongly relied on foreign sources.
The region’s growth potential is impeded by structural
weaknesses (labour market rigidities, low institutional
capacities, weak rule-of-law, etc. negatively affecting
business environment)
24
Prospects and conclusions (cont.)

Quality and sustainability of convergence requires
 Supply side structural reforms to attract (foreign)
investment and increase productivity
 Shift from non-tradable to tradable sectors
 Improvement of public finances' quality
25
Thank you for your attention
26