Regional Economic Outlook Caucasus and Central Asia November 2, 216
Outline Global and Regional Environment Outlook and Policy Actions Policy Priorities 2
Global growth remains lackluster World U.S. Euro Area Emerging markets China Russia 215 3.2 2.6 2. 4. 6.9-3.7 216 3.1 1.6 1.7 4.2 6.6 -.8 217 3.4 2.2 1.5 4.6 6.2 1.1 3
Risks are to the downside 6 World GDP Growth (Percent change) Global Financial Stability: Conditions and Risks Emerging market risks 5 Macroeconomic risks Credit risks 4 3 2 5 percent confidence interval Monetary and financial conditions Market and liquidity risks 1 7 percent confidence interval Risk appetite 9 percent confidence interval 213 214 215 216 217 Source: World Economic Outlook. Oct 216 GFSR Apr 216 GFSR Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite. Source: IMF GFSR report. 4
Commodity prices are expected to remain weak 14 12 1 Brent Crude Oil Price (U.S. dollars per barrel) 8 6 4 2 WEO Baseline Average Oil Price: 216: $43 217: $51 22: $56 211 212 213 214 215 216 217 218 219 95% confidence interval 86% confidence interval 68% confidence interval Brent Futures 12 11 1 9 8 7 6 5 4 3 Commodity Prices (Index, June 211=1) 2 Copper Alumnium Gold Cotton 211 212 213 214 215 216 217 218 Sources: Bloomberg; and IMF staff calculations. 5
Outlook for Georgia s and CCA s key export markets remains weak Real GDP Growth (Percent) 12 1 8 6 4 2-2 -4 21-14 average 215 216 217-21 average -6 Euro area Russia China Turkey U.S. Azerbaijan Armenia 6
Global and Regional Environment Outlook and Policy Actions Policy Priorities 7
Caucasus and Central Asia Kazakhstan Georgia Armenia Azerbaijan Uzbekistan Turkmenistan Tajikistan Kyrgyz Republic Oil and gas exporters Oil and gas importers
Regional growth sharply weakening, with a modest recovery projected for 217 Real GDP Growth (Percent) 16 14 Georgia: Real GDP Growth (Percent) 1 12 8 1 6 8 6.1 4 6 2-2 CCA Oil Exporters Oil Importers 4 2-2 -4 2-14 215 216 217-4 21 24 27 21 213 216 9
Exports and remittances are key channels through which external conditions affect regional growth Total Exports (Billions of USD) Remittances (Jan 211 = 1) 18 16 14 CCA Oil Exporters CCA Oil Importers (RHS) 3 25 28 26 24 Rubles National Currency 12 22 US Dollars 1 8 2 2 18 6 16 4 15 14 2 12 211 12 13 14 15 16 17 1 1 211 12 13 14 15 16 1
Growth has been supported by fiscal policy Oil Exporters: Government Expenditure (Percent of Non-oil GDP) Oil Importers: Government Expenditure (Percent of GDP) 7 5 1 6 5 4 3 2 1-5 -1-15 -2-25 -3-35 -4 45 4 35 3 25 2 15 1 5 8 6 4 2-2 -4-6 -8 AZE KAZ TKM -45 ARM GEO KGZ TJK -1 11
External shocks have led to significant exchange rate movements within the CCA Oil Exporters (U.S. dollars per national currency, January 21 = 1) 11 1 9 8 7 6 5 4 AZE KAZ TKM UZB Oil Importers (U.S. dollars per national currency, January 21 = 1) 11 1 9 8 7 6 5 4 ARM GEO KGZ TJK 12
Post-shock Depreciation real depreciation Inflation in 216 Currency adjustment has helped unwind previous real appreciations, but temporarily increased inflation 1 2 3 4 5 Real Effective Exchange Rates (Percent Change, Trough to Peak or vice versa) ARM GEO KGZ TJK Pre-shock Appreciation 1 2 3 4 5 TKM AZE KAZ UZB real appreciation 45 degree line 14 12 1 8 6 4 2 ARM Nominal Effective Exchange Rates and Inflation (Percent) TKM UZB GEO KGZ TJK KAZ AZE -2-1 1 2 3 4 5 Nominal effective exchange depreciation (Percent change) 13
Fiscal and external vulnerabilities have increased Public Debt (Percent of GDP) External Debt (Percent of GDP) 8 7 6 Change 214 16 214 16 14 12 Change 214 16 214 5 1 4 8 3 6 2 4 1 2 ARM GEO KGZ TJK AZE KAZ TKM UZB ARM GEO KGZ TJK AZE KAZ TKM UZB 14
Financial vulnerabilities have also risen Non-performing Loans (Percent of Total Loans) Private Credit and Deposits (Percent Change) 35 3 25 2 213 214 Latest 25 2 15 Credit Deposits 15 1 5 1 5-5 -1 Note: NPLs in Azerbaijan include only the overdue portion of the loans. In Kazakhstan, the reduction reflects the de-licensing of a bank with significant NPLs and legislation changes allowing banks to move NPLs to a Special Purpose Vehicle. Turkmenistan's data are not available. -15 211 212 213 214 215 216 Note: Adjusted for exchange rate effects. Data not available for Turkmenistan and Uzbekistan. 15
NBG responded well to the external shocks 2.7 7. 9. 2.5 2.3 Lari per USD 6. 5. Policy rate and inflation 8. 7. 6. 2.1 4. 3. 5. 4. 1.9 1.7 2. 1. Inflation Policy Rate 3. 2. 1. 1.5 Jan-214 Aug-214 Mar-215 Oct-215 May-216. 214M1 214M8 215M3 215M1 216M5. 16
For Georgia, large individual exchange rate variations masks limited effective exchange rate movements 18 16 Exchange Rates (July 214=1, decrease=lari depreciation) 18 16 NEER and REER (July 214=1) 14 14 12 Dollar per Lari Euro per Lari 12 Ruble per Lari 1 1 8 8 REER NEER 6 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 6 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 17
Lari depreciation against USD has supported exports and remittances (in Lari) 16 2 14 Exports and Remittances in USD (212Q1 = 1) 18 Exports and Remittances in GEL, and Tourist Arrivals 16 12 14 1 12 1 8 6 Exports SA Remittances SA 8 6 Exports Remittances Tourist Arrivals 4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 212 213 214 215 216 212 213 214 215 216 18
Despite dollarization, banking system remains healthy after the depreciation against USD 8 75 7 Credit and Deposit Dollarization (Percent) Credit Dollarization Deposit Dollarization 15 1 Non-Performing and Watch Loans (Percent of Total Loans) NPLs (NBG Definition) NPLs (Standard 9 day overdue definition) Watch Loans 65 6 5 55 5 Jan-13 Jan-14 Jan-15 Jan-16 Jan-13 Jan-14 Jan-15 Jan-16 19
GEO ALB KGZ TKM KOS TJK BIH SRB TUR BLR ARM KAZ LTU MKD LVA ROM AZE UKR POL UZB BGR HUN HRV AZE UZB TKM ALB TJK TUR ROM BIH MKD POL BLR LTU BGR ARM GEO SRB KGZ KAZ HRV HUN UKR LVA Georgia s external position remains relatively weak Current Account Balance (Percent of GDP) External Debt (Percent of GDP) 8 16 6 14 4 2 12-2 -4 1 8 Regional Average -6-8 -1-12 Regional Average 6 4 2-14 2
Risks to the outlook are tilted to the downside Weaker growth in trading partners (Russia, China, Europe) Further weakening of prices for oil and other commodities Increase in global risk aversion and financing costs Increase in global protectionism and/or Slower domestic reforms 21
Global and Regional Environment Outlook and Policy Actions Policy Priorities 22
Macroeconomic and Financial Policy Priorities Fiscal Continue to support growth in the near term if budget space and buffers allow Develop credible medium-term consolidation plans to ensure sustainability Monetary Focus on inflationary pressures taking into account growth and financial stability Strengthen monetary and exchange rate frameworks Financial Sector Improve supervision, macro-prudential policies, and crisis management frameworks 23
Accelerating structural reforms remains key to unlocking growth potential Structural Reform Indicators (In Global Percent Rank) 1% 8% Emerging Market Averages 6% 4% 2% % Education Quality Financial Services Control of Corruption Export Diversity Export Integration Doing Business Sources: Education Quality: Global Competitiveness Report; Financial Services: Global Competitiveness Report and Doing Business; Control of Corruption: Worldwide Governance Indicators; Export Diversity: IMF/DFID Export Diversity Index; Export Integration: World Economic Outlook; and Doing Business: Doing Business Report. 24
Key Takeaways Commodity prices and growth in key trading partners are set to remain low in the coming years. A weak and fragile recovery is projected, amid subdued external environment, rising vulnerabilities, and lower policy space. Countries with buffers can support growth in the short run, but multi-year fiscal consolidation plans are needed to ensure debt sustainability. Stronger monetary policy frameworks and improved financial supervision can support more flexible exchange rates and reduce risks to inflation and financial sector stability. Structural reforms are needed to boost medium-term growth prospects, improve living standards, and create jobs. 25