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
2300 2200 2100 2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 Three Quarters that Shook the World Kazakkstan Ukraine Russia Argentina Brazil Mexico South Africa Indonesia China 02/01/2007 02/03/2007 02/05/2007 02/07/2007 02/09/2007 02/11/2007 02/01/2008 02/03/2008 02/05/2008 02/07/2008 02/09/2008 02/11/2008 02/01/2009 02/03/2009 02/05/2009 02/07/2009 02/09/2009
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
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
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
EU neighbourhood affected, but differentially across regions, as, for instance, with share prices.
and interest rates interbank interest rates 20 18 16 14 12 10 8 6 4 2 0 70 60 50 40 30 20 10 0 27/08/2007 27/10/2007 27/12/2007 27/02/2008 27/04/2008 27/06/2008 27/08/2008 27/10/2008 27/12/2008 27/02/2009 27/04/2009 27/06/2009 27/08/2009 egypt israel morocco russia Ukraine (rhs)
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
Tensions led to sharp increase in yields in emerging Europe bonds, but spreads narrowing
CDS spreads (incomplete) measure of financial stress and risk aversion for sovereigns
and commercial banks active in the region
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
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 0.0 5.0 10.0 15.0 20.0 25.0 30.0
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 0.0 2004 2005 2006 2007 2008 Total Eastern Partnership
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 150.0 Bulgaria Czech Republic 100.0 Estonia Hungary Latvia Lithuania 50.0 Poland Romania Slovakia Total EU-27 0.0 2004 2005 2006 2007 2008 Total EU new m embers
14 Real effects of the crisis: Russia and Eastern Partnership GDP (% change, y-o-y) 12 10 8 Russia 6 4 2 0-2 -4 2005 2006 2007 2008 2009* EaP GDP Weighted Average -6-8 -10
120 Effects of the crisis: Russia and EaP exchange rates (index: 2006=100) 115 110 105 100 Russia 95 90 85 80 EaP Average 75 70 M5 2009 M3 2009 M1 2009 M11 2008 M9 2008 M7 2008 M5 2008 M3 2008 M1 2008 M11 2007 M9 2007 M7 2007 M5 2007 M3 2007 M1 2007 M11 2006 M9 2006 M7 2006 M5 2006 M3 2006 M1 2006
140 Effects of the crisis: Other emerging markets (index: 2006=100) 120 100 80 60 40 20 0 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
Real effects of the crisis: Russia and EaP Reserves (index, 2006=100) 350 300 250 200 150 100 50 Russia EaP Total M1 2006 M2 2006 M3 2006 M4 2006 M5 2006 M6 2006 M7 2006 M8 2006 M9 2006 M10 2006 M11 2006 M12 2006 M1 2007 M2 2007 M3 2007 M4 2007 M5 2007 M6 2007 M7 2007 M8 2007 M9 2007 M10 2007 M11 2007 M12 2007 M1 2008 M2 2008 M3 2008 M4 2008 M5 2008 M6 2008 M7 2008 M8 2008 M9 2008 M10 2008 M11 2008 M12 2008 M1 2009 M2 2009 M3 2009 M4 2009 M5 2009 M6 2009
Real effects of the crisis: Russia and EaP current account balance (% of GDP) 12 10 8 Russia 6 4 2 0 EaP GDP Weighted Average -2 2005 2006 2007 2008 2009* -4
320 Real effects of the crisis: Eastern neighbors exports 300 280 260 240 220 200 EaP Russia 180 160 140 120 100 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
Real effects of the crisis: Russia and EaP budget figures (% GDP) 8 6 4 Russia 2 0 2005 2006 2007 2008 2009* -2-4 EaP GDP Weighted Average -6-8
60 Real effects of the crisis: Russia and EaP Debt (% GDP) 50 Russia 40 30 EaP GDP Weighted Average 20 2005 2006 2007 2008 2009*
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) 1200 550 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.
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)
Credit to GDP: BY, RU and UA 80 70 Belarus 60 50 40 Russia 30 20 Ukraine 10 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009
25 External Bank Assets: BY, RU and UA (% GDP) 20 Belarus 15 Russia 10 5 Ukraine 0 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008
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.
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?
2300 2200 2100 2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 Three Quarters that Shook the World Kazakkstan Ukraine Russia Argentina Brazil Mexico South Africa Indonesia China 02/01/2007 02/03/2007 02/05/2007 02/07/2007 02/09/2007 02/11/2007 02/01/2008 02/03/2008 02/05/2008 02/07/2008 02/09/2008 02/11/2008 02/01/2009 02/03/2009 02/05/2009 02/07/2009 02/09/2009
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, 2009. The paper can be downloaded from the address below: http://ec.europa.eu/economy_finance/publications/publication15398_en.pdf