CESEE Main Economic Issues

Commerzbank CEEMEA DayCoworth Park, May 20, 2016

Bas B. Bakker Senior Regional Resident Representative

for Central and Eastern Europe

Global growth has decelerated since 2010

2

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real GDP growth(percent)

Emerging and developing countries

Advanced countries

World

Why has global growth disappointed?

Advanced countries remain mired in low growth Large emerging market countries have slowed

down Argentina, Brazil, Russia and Venezuela in

recession Growth in China has slowed down

3

CESEE more complicated: CIS in recession; non CIS doing much better

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-4

-2

0

2

4

6

8

10

2000 2003 2006 2009 2012 2015

CEE EU

CEE non-EU

CIS

3-year rolling average PPP weighted real GDP growth(percent)

CESEE is more complicated

Much of CIS was in recession in 2015 Russia was hit by fall in oil prices and

sanctions Ukraine and Belarus also in recession

But outside CIS, region is doing much better Particularly EU new member states

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In many EU New Member States unemployment is coming down fast and is now near pre-crisis lows

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2

4

6

8

10

12

14

16

18

20

2000 2003 2006 2009 2012 20152

4

6

8

10

12

14

16

18

20

2000 2003 2006 2009 2012 2015

Unemployement rates(percent)

Czech Rep.Hungary

Poland

Bulgaria

Slovakia

Estonia

Latvia

Lithuania

Similar dichotomy in inflation: relatively high in CIS, low elsewhere

7

0

2

4

6

8

10

12

14

16

18

20

2000 2003 2006 2009 2012 2015

3-year rolling average CPI inflation(percent)

CEE EU

CEE non-EU

CIS

Why the difference between non-CIS CESEE and large EMCs?

Commodity price declines hurt some large EMCs; most of non-CIS CESEE commodity importer

Different stages of credit cycle Post 2009, growth in CESEE was held back by

overhang of credit boom and deleveraging By contrast, large EMCs saw acceleration of credit Currently, large EMCs may be at the end of credit

boom In CESEE impact of deleveraging is diminishing

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Large EMCs had credit boom

9

0

10

20

30

40

50

60

70

80

90

2003 2005 2007 2009 2011 2013 2015

BrazilRussia

Turkey

Credit to private non-financial sector(percent of GDP)

110

120

130

140

150

160

170

180

190

200

2003 2005 2007 2009 2011 2013 2015

China

In non-CIS CESEE there has been deleveraging

10Latv

ia

Slov

enia

Hun

gary

Esto

nia

Lith

uani

a

Bela

rus

Bulg

aria

Rom

ania

Croa

tia

Serb

ia

Ukr

aine

Koso

vo

Mol

dova

Alba

nia

Bosn

ia

Slov

akia

Czec

h Re

p.

Pola

nd

Russ

ia

-50

-40

-30

-20

-10

0

10

20

30

Change in claims on non-financial private sector to GDP ratio, 2010-2014(percentage points)

It had a credit boom pre-2009; and has been working off the overhang

Growth in CESEE is projected to accelerate this year

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Real GDP growth(WEO Spring 2016 , percent y/y)

2015 2016

Note: Striped fill denotes CESEE country under IMF programs.

      below - 5 percent-5 - 00 - 11 - 22 - 3

above 3 percent

below - 5 percent-5 - 00 - 11 - 22 - 3

above 3 percent

Although there are many downside risks

Disappointing Euro Area growth Geopolitical tensions Refugee crisis Hard landing in China Slowing growth in large emerging markets

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Brexit

Direct trade and financial links with CESEE are not large for most countries

Germany is an important trading partner for theCESEE, with large direct links to the UK

Risk that Brexit could trigger renewed market turmoil, and long period of uncertainty.

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Renewed financial market turmoil…

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0

50

100

150

200

250

300

350

400

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

5-year CDS spreads(basis points)

Developing Asia

CESEE

Latin America

.. Interacting with rising political instability…

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EIU Political Stability Risk Score(0 = no risk)

May 2016 March 2015

0 - 1010 - 2020 - 3030 - 4040 - 5050 - 60

above 60

0 - 1010 - 2020 - 3030 - 4040 - 5050 - 60

above 60

Political instability in number of countries

Kosovo Macedonia Moldova Ukraine

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0

0.5

1

1.5

2

2.5

3

3.5

4

Spring 2016Fall 2014

Adjustment fatigue and even reversal of fiscal policy stance

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Estimates of 2016 Fiscal Deficit by WEO vintage(percent of GDP)

Estimates of 2016 deficit as in:

Even without downside materializing growth is too low in many countries

Catch-up has stalled, and in some countries even reversed

Countries need to get back to rapid convergence

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Catch-up has continued post-2008 in Central Europe and Baltics, but stalled in many SEE and CIS countries.

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Change in income per capita gap to Germany(percentage points, PPP-adjusted)

2003-08 2010-2015

below -3pp.-3.0 - 0.00.0 - 3.03.0 - 6.06.0 - 9.0

above 9pp.

below -3pp.-3.0 - 0.00.0 - 3.03.0 - 6.06.0 - 9.0

above 9pp.

Demographics and much reduced productivity growth may make mediun-term growth lower than expected

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-1

0

1

2

3

4

5

SEE non-EU CIS CE5 SEE EU Baltics

TFP contribution to GDP growth (pp, annual average)

Note: SEE non-EU excludes Serbia and Montenegro.

2010-2014

2000-2004

How can we boost convergence going forward?

Question we addressed in depth in our just-published Spring 2016 issue of “CESEE Regional Economic Issues.”

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Further raising employment rates is needed, as is higher labor productivity

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ALB

BLR

BIH

BGR

HRV

CZEEST

HUN

LVA LTU

MKD,

MDA

POL

ROU

RUS

SRB

SVK

SVN

UKR

20

30

40

50

60

70

80

10 20 30 40 50 60 70 80 90 100 110

Empl

oym

ent r

ate

(per

cent

)

Labor productivity(PPP adjusted USD, thousands)Note: bubble size reflects GDP per capita (PPP)

Labor utilization and productivity

NLDDEU

To raise labor productivity more investment needed

The capital stock per capita in a typical CESEE economy only about a third of that in advanced Europe.

Investment gaps are particularly wide in infrastructure

In most of the region, domestic savings rates are too low

Policies should therefore focus on institutional reforms that reduce inefficiencies and increase returns on private investment and savings.

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Boosting Total Factor Productivity (TFP) is important as well

CESEE countries may have to address structural and institutional obstacles that prevent efficient use of available technologies, or lead to inefficient allocation of resources.

Our recent CESEE report suggests the largest efficiency gains are likely to come from Improving the quality of institutions (protection of

property rights, legal systems, and healthcare) Increasing the affordability of financial services

(especially for small but productive firms) Improving government efficiency.

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Thank you