THE EU s EASTERN NEIGHBOURING COUNTRIES AND THE CRISIS

Transcription

1 THE EU s EASTERN NEIGHBOURING COUNTRIES AND THE CRISIS by Dr. Loukas STEMITSIOTIS Dr. Lúcio VINHAS DE SOUZA European Commission DG Economic and Financial Affairs

2 Three Quarters that Shook the World Kazakkstan Ukraine Russia Argentina Brazil Mexico South Africa Indonesia China 02/01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/2009

3 Overview of Presentation Yearly DG ECFIN Occasional paper on EU neighbourhood This year special topic on the global impact of the crisis Crisis impact and recent developments in Russia and Eastern Partnership countries Policy responses and challenges Discussion

4 Main Points No region in the world immune Financial transmission channels powerful and near-immediate Externally exposed countries more vulnerable to first-order impact Feed-back loops with the real economy Impact and lag dependant on prior buffers and adequacy of policy responses Recent stabilisation, but risks remain EBRD 1 of September 2009, London

5 Main Points Large cross country variation in policy responses and instruments, depending on prior buffers and adequacy of policy actions Near term versus long term fiscal policy Securing external financing Crisis response in relation to implementing long-term reform agenda (including at international level, e.g., G 20) EBRD 1 of September 2009, London

6 EU neighbourhood affected, but differentially across regions, as, for instance, with share prices.

7 and interest rates interbank interest rates /08/ /10/ /12/ /02/ /04/ /06/ /08/ /10/ /12/ /02/ /04/ /06/ /08/2009 egypt israel morocco russia Ukraine (rhs)

8 Eastern neighbourhood among the worst affected regions globally Several elements similar to some new MS Reliance on foreign funding Banking sectors under strain Forced adjustment of exchange rates in the face of capital outflows For some, commodities reliance amplified the shock Fiscal buffers and/or foreign assistance as a cushion Quite direct feed-through of the crisis crucial difference with Mediterranean neighbourhood but not only for the worse

9 Tensions led to sharp increase in yields in emerging Europe bonds, but spreads narrowing

10 CDS spreads (incomplete) measure of financial stress and risk aversion for sovereigns

11 and commercial banks active in the region

12 Cross-border exposures an issue, but not uniformly across either countries or regions Graph: Cross border loans from BIS reporting banks (% GDP) Libya Ukraine 24 Russia Syria 18 Moldova Algeria 12 6 Belarus Morocco 0 Azerbadijan Israel Georgia Tunisia Armenia Egypt Jordan Lebanon 2007Q3 2008Q3

13 Foreign bank claims in the eastern neighbourhood overwhelmingly European/EU Foreign claims of the BIS reporting banks on the EU eastern neighbours in 2008 Armenia % of country's GDP Belarus Georgia Azerbaijan Moldova All BIS banks European BIS banks Kazakhstan Russia Ukraine

14 Very rapid growth in bank claims during the years leading up to crisis in % of country's GDP 40.0 Claims of BIS reporting banks on the EU eastern neighbours Armenia 30.0 Azerbaijan Georgia 20.0 Belarus Moldova Ukraine 10.0 Russia Kazakhstan Total Eastern Partnership

15 yet ratios still well below NMS. Difficult to infer risk of balance sheet effects on real economy in % of country's G DP Claims of BIS reporting banks on the EU new member states Bulgaria Czech Republic Estonia Hungary Latvia Lithuania 50.0 Poland Romania Slovakia Total EU Total EU new m embers

16 14 Real effects of the crisis: Russia and Eastern Partnership GDP (% change, y-o-y) Russia * EaP GDP Weighted Average

17 120 Effects of the crisis: Russia and EaP exchange rates (index: 2006=100) Russia EaP Average M M M M M M M M M M M M M M M M M M M M M1 2006

18 140 Effects of the crisis: Other emerging markets (index: 2006=100) Brazil Chile Indonesia India Argentina South Africa Mexico Turkey Thailand South Korea Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09

19 Real effects of the crisis: Russia and EaP Reserves (index, 2006=100) Russia EaP Total M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M6 2009

20 Real effects of the crisis: Russia and EaP current account balance (% of GDP) Russia EaP GDP Weighted Average * -4

21 320 Real effects of the crisis: Eastern neighbors exports EaP Russia Mar-06 Jan-06 Jul-06 May-06 Nov-06 Sep-06 Mar-07 Jan-07 Jul-07 May-07 Nov-07 Sep-07 Mar-08 Jan-08 Jul-08 May-08 Nov-08 Sep-08 Mar-09 Jan-09

22 Real effects of the crisis: Russia and EaP budget figures (% GDP) Russia * -2-4 EaP GDP Weighted Average -6-8

23 60 Real effects of the crisis: Russia and EaP Debt (% GDP) 50 Russia EaP GDP Weighted Average *

24 Policy responses to the crisis in the EU s Eastern neighbors Armenia* Azerbaijan Belarus* Georgia* Moldova* Russia Ukraine* Fiscal support Fisca l stim ulu s (% of G DP ) * * * 3,0 6,0 Nature of stimulus * Infrastructure 1,0 * Export * Tax cu ts 1,0 0,5 * N on -b an k b ail-outs 1,0 * O th er 3,5 Fisca l stim ulu s (% of G DP ) 3,0 6,0 Monetary support Monetary easing (basis points, decrease from peak) Q u an tita tive easing Financial support Deposit guarantees!!!! Liquidity provision!!!! Loan g uarantees!! Cap ital in je ction!!!!! Asset purchase! Nationalisation 25% against USD 17% against USD 33% against basket Depreciation of pegged curre n cie s Drop in re se rve re q uirements!!! Legend: * Country under IMF programme, *** Announced, Effective,! yes 37% against USD Source: Central banks of the ENP-countries, EC.

25 Why different effects from the crisis? Level of reliance on commodity exports Adequacy, consistency, speed and size of the policy response (especially in the fiscal side) and the external support programmes (which are also a part of the policy response) And, crucially, different amounts of financial distortions (smaller credit growth and external exposure of -largely state-ownedbanking sector)

26 Credit to GDP: BY, RU and UA Belarus Russia Ukraine 10 Q Q Q Q Q Q Q Q Q Q Q Q Q1 2009

27 25 External Bank Assets: BY, RU and UA (% GDP) 20 Belarus 15 Russia 10 5 Ukraine 0 Q Q Q Q Q Q Q Q Q Q Q Q4 2008

28 Main Points (again) The EU s Eastern neighbouring economies most integrated into the world economy and most liberalised were the hardest hit. This does not imply protectionism and autarky but a need for policies designed to counterweigh the negative shocks arising from (beneficial) greater global integration. Macroeconomic stabilisation factors failed to insulate from the crisis but enabled the countries to implement policies that cushioned initial shocks. Well-designed fiscal policy tools and frameworks plus a consistent exchange rate policy are of particular importance. Growth models that relied more on primary sectors were seemingly more affected by the downturn, calling for intensified efforts to diversify growth sources. The financial component of the shock led the real one, so global in character and coordinated reforms of supervisory and regulatory financial frameworks are crucial. Exit Strategy also crucial.

29 The Way Forward: Questions Some initial signs of recovery, but how green are those shoots? Exit strategy: (progressively ) unwinding of the stimulus and additional imbalances Longer term: what lessons to draw from the crisis?

30 Three Quarters that Shook the World Kazakkstan Ukraine Russia Argentina Brazil Mexico South Africa Indonesia China 02/01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/2009

31 Thank you for your attention! This presentation is based on the Thematic article, the Overview of Recent Economic Developments in the EU s Eastern neighbours and on the Eastern Country Chapters of the ECFIN Occasional Paper n 40, The Impact of the Global Crisis on Neighbouring Countries of the EU, European Commission, Brussels, The paper can be downloaded from the address below: