The Impact of the Global Economic Crisis on Central and Eastern Europe Fourth Central European CEMS Conference Warsaw, February 25, 211 Mark Allen Senior IMF Resident Representative for Central and Eastern Europe
Outline of the presentation Course of the crisis Why CEE was so vulnerable How the crisis affected the region Aftermath of the crisis
Growth in the Great Moderation Change in real GDP (Year on year) 1 8 World Emer.& Develop. Eco. CEE4 Advanced Economies Cent. & East. Europe 6 4 2-2 -4 1997 1998 1999 2 21 22 23 24 25 26 27 Source: WEO database
Inflation under control Change in Consumer Prices Index (Year on year) 2 18 16 14 12 1 8 6 4 2-2 World Advanced Economies USA EU Cent. & East. Europe Emer.& Develop. Eco. CEE4 1997 1998 1999 2 21 22 23 24 25 26 27 Source: WEO database
But growing global imbalances Current Accout Imbalances (billions of USD) 2 15 1 5 Fuel exporters Cent. & East. Europe USA Japan Germany China ROW World -5-1 -15 2 21 22 23 24 25 26 27 28 Source: WEO database
And rising asset prices House prices (index, 23q1=1) 17 16 15 14 13 12 11 Ireland Netherlands Spain* UK USA EA-16 1 * q1-24=1 Q1-23 Q1-24 Q1-25 Q1-26 Q1-27 Source: Haver Analytics
Rapidly growing leverage Debt Outstanding by Sector (US) (Billions of dollars) 6 5 4 Foreign Federal government State and local governments Total Business Total Household Domestic Financial Sector 3 2 1 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 Source: Federal Reserve
And explosive growth of new instruments Total Interest Rate and Currency Swaps outstanding (Notional amounts, Trillions of dollars) 5 45 4 35 3 25 2 15 1 5 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 Source: ISDA Market Survey
Emergence of sub-prime crisis US Sub-prime mortgages deliquencies by vintage year (percent) 4 35 3 25 26 25 2 21 2 15 27 24 22 23 1 5 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 Source: GFSR, April 28
Spread of the financial crisis Heat map Subprime RMBS Money markets Financial Institutions Commercial MBS Prime RMBS Corporate credit Emerging Markets Sovereign credit Jan-7 Jan-8 Jan-9 Jan-1 Source: Global Financial Stability Report, April 21
Collapse of credit supply Bank Lending to Private Sector (percent, year on year) 15 1 5-5 United States Euro Area United Kingdom -1 21 22 23 24 25 26 27 28 29 Source: Global Financial Stability Report, January 211
Unprecedented fall in world trade World exports growth (percent, year on year) 5 4 3 average 2 1-1 -2-3 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 25 29 Source: WEO database
Unprecedented fall in world trade World exports growth (percent, year on year) 5 6 4 5 43 32 2 1 1-1 -1-2 -2-3 -3-4 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 25 29 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Source: WEO database average 1949-29 average
CEE region most seriously affected GDP growth (percent, year on year) 12 1 8 6 4 2-2 -4-6 -8 Source: WEO database Advanced Economies Emer.& Develop. Eco. Cent. & East. Europe Developing Asia Western Hemisphere 24 25 26 27 28 29 21 211 212
Recession sharpest in Hungary GDP growth (percent, year on year) 12 1 8 6 4 2-2 -4-6 -8 Czech Republic Slovak Republic Hungary Poland 24 25 26 27 28 29 21 211 212 Source: WEO database
Wide current account deficits in CEE Current Account Balances (percent of GDP) 8 6 4 Advanced Economies Cent. & East. Europe Western Hemisphere Emer.& Develop. Eco. Developing Asia CEE4 2-2 -4-6 -8-1 2 21 22 23 24 25 26 27 28 Source: WEO database
Region is very open to trade Trade openess (percent of GDP, 27) 2 18 16 Emerging Europe Latin America Africa Asia 14 12 1 8 6 4 2 Turkey Romania Serbia, Poland Croatia Ukraine Latvia B&H Lithuania Estonia Bulgaria Czech Rep. Hungary Slovak Rep. Brazil Colombia Argentina Uruguay Mexico Ecuador Bolivia Paraguay Kenya Egypt South Africa Nigeria Morocco India Indonesia Philippines Thailand Source: WEO database
And dependent on eurozone market Merchandise exports to Euro Area as a share of GDP (27-29 average) 5 45 4 35 3 25 2 15 1 5 Czech Rep. Hungary Slovak Rep. Slovenia Bulgaria Poland Estonia Romania Lithuania Russia Croatia United Kingdom Source: Direction of Trade Statistics; World Economic Outlook, April 21 Latvia Turkey Ukraine China Brazil United States
Steady capital inflows before crisis Net Capital Inflows (percent od GDP) 12% Poland 1% Czech Republic Hungary Slovak Republic 8% 6% 4% 2% % -2% 1999 2 21 22 23 24 25 26 27 28 29 Source: WEO database
Credit fueled a property boom 3 Change in nominal housing prices, 23-7 25 Latvia Estonia 2 Bulgaria 15 Lithuania 1 Poland Czech Republic 5 Slovak Republic Hungary 1 2 3 4 5 6 Source: WEO database Change in credit to GDP ratio, 23-7
And increase in stock prices Equities indices (Jan-5=1) 3 25 2 Hungary applies for external support Czech Hungary Poland Slovakia 15 1 5 Jan-5 May-5 Sep-5 Jan-6 Source: Haver, WEO database May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11
Real wages also grew strongly Real wage index (Jan-5=1) 125 12 115 Czech Hungary Poland (enterprise sector) Slovakia Hungary applies for external support 11 15 1 95 Jan-5 May-5 Sep-5 Jan-6 Source: Haver, WEO database May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1
Fiscal strength was misleading General Government Balance (percent od GDP) -1% -9% -8% -7% Czech Republic Hungary Poland Slovak Republic -6% -5% -4% -3% -2% -1% % 24 25 26 27 Source: WEO database
Net banking inflows came to a stop Banking Flows (millions USD) 4 3 2 Slovakia Czech Republic Hungary Poland CEE4 1-1 -2 Dec.27 Mar.28 Jun.28 Sep.28 Dec.28 Mar.29 Jun.29 Sep.29 Source: BIS
IMF provided assistance to region 28 EU countries: 29 28 EU member countries SBA program FCL program 28 29 29 29 21 211 21 21 Non-EU countries: SBA program EFF program PCL program Precautionary programs
Global growth has resumed Change in real GDP (Year on year) 1 8 6 4 2-2 -4 World Advanced Economies Emer.& Develop. Eco. Cent. & East. Europe CEE4 22 24 26 28 21 212 Source: WEO database
But imbalances are reemerging Current Accout Imbalances (millions of USD) 2 15 1 5 Fuel exporters Cent. & East. Europe USA Japan Germany China ROW World -5-1 -15 2 21 22 23 24 25 26 27 28 29 21 211 212 Source: WEO database
Non-performing loans have risen Non-performing loans (percent of total loans) 12 1 8 Czech Republic Slovak Republic Hungary Poland 6 4 2 25 26 27 28 29 21 Source: IMF, GFSR
Fiscal consolidation is needed General Government Fiscal Balance (percent of GDP) -1-9 -8-7 -6-5 -4-3 -2-1 Euro Area Czech Republic Hungary Poland Slovak Republic 23 24 25 26 27 28 29 21 211 212 Source: WEO database
As debt burdens increase General Government Gross Debt (percent of GDP) 1 9 8 7 6 5 4 3 2 1 Source: WEO database Euro Area Czech Republic Hungary Poland Slovak Republic 23 24 25 26 27 28 29 21 211 212
1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. Hares and tortoises Average real GDP growth, 23-213 6 5 4 3 2 Macedonia, FYR Hungary Kosovo Poland B&H Czech Republic Croatia Serbia Albania Bulgaria Slovak Republic Turkey Russia Moldova Montenegro Ukraine Romania Estonia Lithuania Latvia 1 2 3 4 5 6 7 8 9 1 Average real GDP growth, 23-28 1 Source: IMF, World Economic Outlook and IMF staff calculations.
Lessons for Central and Eastern Europe 1. Accession to European Union and eurozone will not anchor policy as in the past. 2. Growth can no longer rely on such large inflows of bank credit. 3. Budgets need consolidation throughout the region. 4. Growth will need a new stimulus Based on exports, rather than domestic consumption. Regulatory and structural reforms still needed to remove obstacles to entrepreneurship and efficiency.
Thank you!