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The impact of the global crisis on the SPECA countries José Palacín Economic Cooperation and Integration Division UNECE 1 Structure presentation The crisis: channels of transmission and domestic vulnerabilities Implications for SPECA countries What sort of recovery? Lessons from the crisis 2 Economic crisis. Part 1 The worldwide economic crisis started as a a financial crisis in late 2007. Countries and companies that had to raise external finance were exposed. Among SPECA countries, only Kazakhstan was initially affected by disruptions in international capital markets. Kazakhstan’s banking system had grown rapidly, funded by foreign borrowing. That rapid expansion came to an abrupt halt, together with the real estate boom fuelled by growing credit. Cross-border links: Kazakh banks own around one third of Kyrgystan banking assets. 3 Economic crisis. Part 2 In late 2008, financial turbulences intensified and prompted robust policy intervention to avoid systemic breakdown. But the crisis had evolved. The real sector was being affected by financial problems and lack of confidence. A synchronised worldwide slump in output was taking place. Emerging markets were the only relatively bright spot in this darkened landscape But not in the CIS. Russia, the largest economy, was shrinking fast. 4 Implications for SPECA countries Worldwide output contraction led to falling commodity pricesnot only oil. The rapid contraction of the Russian economy reduced the demand for foreign goods and labour. Financial troubles affected countries differently – but all of them have been exposed to disruptions in the international financial system, lower capital flows and increased risk aversion. 5 Differences in economic performance Widespread economic slowdown but with important differences, reflecting exposure to the different channels for the transmission of the crisis Differences in the ability to implement offseting policies. In non-energy exporting countries, IMF programmes are in place. Unlike other transition economies in the region, all SPECA countries have continued to grow in 2009 – with the exception of Kazakhstan where the financial shock was more important. 6 Net fuel exporters (GDP growth, percentages) 12 10 2008 8 2009 6 2010 4 2 0 -2 -4 Azerbaijan Source: UNECE Kazakhstan Turkmenistan Uzbekistan 7 Net fuel importers (GDP growth, percentages) 9.0 8.0 7.0 2008 6.0 2009 5.0 2010 4.0 3.0 2.0 1.0 0.0 Kyrgyzstan Source: UNECE Tajikistan 8 Implications for SPECA countries SUMMARY SHRINKING DEMAND IN KEY MARKETS LOWER COMMODITY PRICES LOWER REMITTANCES LOWER FOREIGN INFLOWS AND TRADE FINANCE DIFFICULTIES DECLINE IN TRADE VOLUME AND VALUES 9 A DRASTIC CHANGE: THE END OF RUSSIAN EXPANSION (GDP quarterly growth, year-on-year, percentage)) 10 5 0 -5 -10 Source: Statistical Service of the Russian Federation 2009 2008 2007 2006 2005 2004 2003 2002 2001 -15 10 CIS -Terms of trade (Annual growth, percentages) Source: IMF 2010F 2009F 2008 2007 2006 2005 2004 2003 2002 2001 25 20 15 10 5 0 -5 -10 -15 -20 -25 11 Commodities dynamics (Index numbers. January 2007=100) 250 200 150 100 Brent Crude Gold 50 Aluminium Cotton Source: World Bank, own calculations 01/09/09 01/07/09 01/05/09 01/03/09 01/01/09 01/11/08 01/09/08 01/07/08 01/05/08 01/03/08 01/01/08 01/11/07 01/09/07 01/07/07 01/05/07 01/03/07 01/01/07 0 12 Remittances have been large (Inflows as percentage of GDP) Source: IMF 13 Remittances: sharp change of trend Growth remittances 2003-2008 Growth H1 2009 (average annual, percent) (Russian estimate) Azerbaijan 66.8 -38.3 Kyrgyzstan 76.5 -26.9 Tajikistan 73.7 -32.7 Source: IMF, Central Bank of Russia 14 Anti-crisis response Energy-exporting countries have implemented strong policy responses to the crisis, using the savings accumulated during the boom years. In energy-importing countries, who have suffered the most from labour market linkages with the large economies in the region, official financing has provided some fiscal space to offset the negative impact of the crisis. 15 International support (percent of GDP) Budget grants 2007 2008 2009 IMF disbursements 2007 2008 2009 Source: IMF Kyrgyzstan 2.4 1.7 5.6 Tajikistan 1.9 1.6 3.1 0.1 0.8 1.1 0.9 16 Open economies (Exports and imports as percentage GDP, 2008, BOP basis) 0 20 40 60 80 Azerbaijan Exports Kazakhstan Imports Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Source: ADB.2007 for Turkmenistan. 17 Sharp falls in trade (3-months, rolling window, $ miilion) KAZAKHSTAN AZERBAIJAN 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 18000 16000 Exports 14000 Imports 12000 Exports Imports 10000 8000 6000 4000 18 Source: IMF, own calculations 2009M3 2008M9 2008M3 2007M9 2007M3 2006M9 2006M3 2005M9 0 2005M3 2008M12 2008M7 2008M2 2007M9 2007M4 2006M11 2006M6 2006M1 2005M8 2005M3 2000 Sharp falls in trade (3-months, rolling window, $ miilion) KYRGYZSTAN 4500 1400 4000 3500 TAJIKISTAN Exports 1200 Imports 1000 3000 Exports 2500 800 2000 600 Imports 1500 400 1000 200 500 0 2005M3 2006M2 2007M1 2007M12 2008M11 0 2005M3 2006M2 2007M1 2007M12 2008M11 19 Source: IMF, own calculations Sharp falls in trade (3-months, rolling window, $ miilion) TURKMENISTAN UZBEKISTAN 3500 3000 3000 2500 Exports 2500 Imports Exports 2000 Imports 2000 1500 1500 1000 1000 500 500 0 2005M3 2006M2 2007M1 2007M12 2008M11 0 2005M3 2006M3 2007M3 2008M3 20 Source: IMF, own calculations 2009M3 Trade Finance WTO EXPERT GROUP MEETING ON TRADE FINANCE – 15 SEPTEMBER 2009: Liquidity has improved for the larger banks on tenures of up to one year, albeit selectively across regions and categories of banks. Capital requirements for short-term trade related lending under Basel II are a constraint. Liquidity has not returned in some regions and countries, including low income countries in Central Asia. “Participants expressed concern regarding the situation in Kazakhstan and Ukraine, where perceived risk was very high and bank default could have systemic repercussions in trade finance” 21 Exchange rate volatility National currency per Russian rouble (January 2008=100) 160 150 140 AZ KZ TJ UZ KY 130 120 110 100 90 Source: CIS Stat, own calculations Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 80 22 Exchange rate regimes National currency per USD dollar (January 2008=100) 110 105 100 95 90 AZ KZ 85 TJ UZ KY 80 Source: CIS Stat, own calculations Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 75 23 External positions Exchange rate pegs and incomplete adjustments: competitiveness losses for some countries Non-energy exporting countries have large current account deficits. Official financing has become more important to close the gap. Exchange rate tensions have implications for dollarized financial systems. 24 Improved (but uncertain) global outlook Economic and financial indicators suggest an improved outlook for the global economy. With some exceptions, most economies are expected to grow in 2009 But there is yet a great deal of uncertainty 25 Improving global prospects GDP growth, percentages 10 8 6 4 2 0 -2 World -4 Advanced Emerging -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: IMF 26 Improving global prospects Emerging markets net private capital inflows Source: Institute for International Finance 27 What sort of recovery? Commodity prices will increase but improvement in terms of trade will benefit energy exporters the most. The speed of the upturn in Russia will influence economic prospects in energyimporting countries – but remittances are not returning to previous levels. The banking sector remains fragile 28 The crisis: a reminder The origin of the crisis was external It has shown: – the risks of excessive economic concentration – the importance of prudent management of resources in energy-rich countries. 29 What role for regional cooperation? A way to increase economic resilience through: Trade facilitation Infrastructure development that promotes: Economic diversification Employment opportunities in new sectors 30