Regional Economic OutlookCaucasus and Central AsiaCaucasus and Central Asia

May 2015

Outline

Global EnvironmentGlobal Environment

CCA Outlook, Risks, and PoliciesCCA Outlook, Risks, and Policies

2

Global growth remains moderate and uneven

E ro Emer inWorld U.S.

EuroArea

Emergingmarkets

China Russia

2014 3 4 2 4 0 9 4 6 7 4 0 62014 3.4 2.4 0.9 4.6 7.4 0.6

2015 3.5 3.1 1.5 4.3 6.8 -3.8

2016 3.8 3.1 1.7 4.7 6.3 -1.1

3

Oil prices are expected to remain lower than in the recent past, but uncertainty is largethe recent past, but uncertainty is large

140

Oil Price Prospects(Brent crude oil; U.S. dollars a barrel)

B t F t C

120

140

120

Brent Futures Curve(October 2014 REO vs. May 2015 REO Update))

80

100

80

100

40

6095% confidence interval

86% confidence interval

68% confidence interval40

60

80

October 2014 REOMay 2015 REO Update

202013 2014 2015 2016

68% confidence interval

Futures, Feb. 11, 2015 40

Jan'

13A

ug'13

Mar

'14O

ct'14

May

'15D

ec'15

Jul'1

6Fe

b'17

Sep'

17A

pr'18

Nov

'18Ju

n'19

4

Other commodity prices have also declined, although not by as much as oil pricesalthough not by as much as oil prices

Commodity Prices(2005=100)

270

320

220

120

170

FoodMetalsCrude oil (APSP)

70Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

( )Natural gas (Asia)

5

Caucasus and Central Asia

Oil & gas exporters

6

Oil & gas importers

Growth is expected to weaken further in 2015 with dlower oil prices and Russia’s economic contraction

Real GDP Growth(Annual percent change; dots reflect 2015 growth projections)

8

10180200

TKM

4

6

120140160

GEO KAZTJK

UZB

-2

0

2

406080

100

Oil price (APSP) - LHSCCA Oil ExportersCCA Oil I

ARM

AZE

GEO KAZKGZ

-6

-4

02040

2011 2012 2013 2014 2015 2016

CCA Oil ImportersRussia

7

Ties to Russia go beyond exports and include remittances, FDI and confidence

Linkages with RussiaEx ports Imports Remittances FDI

ARM

g

GEO

KGZ

TJK

AZE

KAZ

TKM

UZB

8

<3% of GDP 3-10% of GDP >10% of GDP

Lower oil prices and Russia’s contraction are key reasons for downgrading of CCA forecasts

Oil Exporters Oil Importers

2014

Russia slowdown

Oil price decline

p

2014

Russia slowdown

Oil price decline

p

2015

Other country-specific factors

2015

Other country-specific factors

2015

2016

2015

2016

-4.0 -3.0 -2.0 -1.0 0.0 1.0

2016

-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0

2016

9

Weakening revenues and countercyclical spending are widening fiscal deficitsp g g

Fiscal Balances(Percent of GDP)

Fiscal Breakeven Oil Prices, 2015(U.S. dollars per barrel)

6

8

10CCAOilExportersCCAOilImporters 80

90

2015 WEO

2

4

6

60

702015 WEO Oil Price

4

‐2

0

40

50

‐6

‐4

2011 2012 2013 2014 2015 2016 30

40

AZE KAZ TKM

10

Currencies are weakening against the dollar yet losing competitiveness in real terms

Nominal Exchange Rates, Jan. 2011-Feb. 2015 Real Effective Exchange Rates, Jan. 2013-Feb. 2015(U.S. dollars per unit of national currency; Index, Jan. 2011=100)

(Index, Jan 2014=100)

120

110

120

90

100

110

80

90

100

110

70

80

90 CCA Oil ExportersCCA Oil ImportersUnited StatesRussia

50

60

70

80 CCA Oil ExportersCCA Oil ImportersRussia

6040

50

11

Depreciations are raising inflationary pressures, despite lower growth and commodity pricesdespite lower growth and commodity prices

InflationInflation(CPI, percent change; dots represent 2015 inflation)

12

14CCAOE TJK

12

14

8

10

12 CCAOIKGZ

AZETKM

UZB8

10

12

2

4

6 ARM

GEO

KAZ

TKM

2

4

6

0

2

2005-08 2009 2010 2011 2012 2013 2014 20150

2

12

External positions are worsening, especially for oil exporters

Current Account Balances Reserve Coverage(Percent of GDP)

10

15 CCA Oil ExportersCCA Oil Importers

10

12

10

12CCAOilExportersCCA Oil I t

(Months of Imports)

0

5

6

8

10

6

8

10 CCAOilImporters

-10

-5

2

4

6

2

4

6

-20

-15

0

2

0

22000

2002

2004

2006

2008

2010

2012

2014

2016

13

2 2 2 2 2 2 2 2 2

The financial sector faces multiple challenges

30

Non-performing Loans, Dollarization(Percent of total loans; latest available data)

Capital Adequacy Ratios(Percent of risk-weighted assets; latest available data)

10040 2012

25

30

Dec‐1380

90

100

30

35

4020132014Loandollarization(%oftotal)‐ RHS

15

20 Dec‐14

50

60

70

20

25

10

20

30

40

10

15

0

5

ARM KAZ KGZ TJK UZB0

10

20

0

5

KAZ TJK ARM AZE KGZ UZB

14

ARM KAZ KGZ TJK UZBKAZ TJK ARM AZE KGZ UZB

Risks have increased and remain tilted to the downsideto the downside

W k h i diWeaker growth in trading partners (especially Russia, also China and Europe)

Further weakening of prices for oil and other commodities

Risks related to the normalization of U.S. monetary policy

15

Near-term policy priorities center on preserving macro-financial stability while shoring up growth

Fiscal

macro financial stability while shoring up growth

FinancialMonetary &

Fiscal

• Temporary counter-li l li i if b ff

Financial

• Monitor and manage the financial stability risks.

External• Greater exchange rate flexibility can help buffercyclical policies if buffers

and fiscal space allow.

• Fiscal consolidation over

financial stability risks.

• Banks should be required to appropriately classify the

flexibility can help buffer shocks, prevent reserve drawdowns, and protect competitiveness.Fiscal consolidation over

the medium term, as soon as cyclical conditions allow, to reflect new oil market

loans and have adequate provisions.

• Crisis management

• Tighten monetary policy, if inflationary pressures remain elevated and if itrealties for oil exporters

and the need to rebuild buffers among oil i t

• Crisis management frameworks should be strengthened.

remain elevated and if it does not undermine financial sector stability.

importers.

16

Stronger macro-financial policy frameworks can increase resilience to unexpected shockscan increase resilience to unexpected shocks

Fiscal Policy: More fiscal transparency, and y p ystronger medium-term budget frameworks

M t P li M d t liMonetary Policy: Modern monetary policy regimes with clear interest rate guidance

Financial Sector Policy: Clear definition of responsibilities, modern supervision practicep p p

17

Medium-term growth prospects are weakening in the CCA: a “new mediocre”?g

Potential GDP Growth(Percent)¹ ,² 2003-07

2008 14

Differences with EMDC(Percentage points)2

7

8

9 2008-14

1

2

2

4

5

6

-1

0

1

1

2

3

2

-2

-1CapitalLaborProductivity

0

1

CCAOE CCAOI

-2CCA OE CCA OI CCA OE CCA OI

2003-07 2008-14

18

Structural reforms can help improve competitiveness, raise economic growth and make it more inclusiveStructural Reform Priorities

or uptio

n

eauc

racy

stru

ctur

e

e catio

n

al nce

ulat

ions

Labo

Corr

u

Bure

Infra

Trad

Educ

Lega

Fina

n

Regu

CCA 71% 3% 3% 51% 50% 38% 44% 41% 40%

Armenia 49% 3% 3% 46% 59% 39% 44% 51% 50%

Azerbaijan 77% 3% 3% 51% 47% 38% 42% 30% 34%e ba ja

Georgia 71% . . 59% 88% 32% 45% 41% 73%

Kazakhstan 90% 3% 23% 57% 44% 53% 49% 47% 38%

Kyrgyz Republic 37% . . 10% 50% 26% 25% 33% 40%

Sub-Saharan Africa 50% 10% 18% 18% 32% 29% 36% 28% 35%

Latin America 26% 10% 23% 41% 39% 48% 38% 46% 55%

Emerging Europe 49% 50% 30% 53% 50% 53% 50% 50% 66%

Developing Asia 53% 48% 23% 37% 42% 43% 46% 41% 37%

Advanced Economies 84% 81% 83% 87% 84% 82% 78% 64% 90%

Lowest 20th Percentile 60th-80th Percentile20th-40th Percentile Top 20th Percentile40th-60th Percentile Data Unavailable

Sources: Labor: World Economic Forum (WEF); Corruption: PRS; Infrastructure: WEF; Trade: WEF; Education: WEF; Legal: WEF and World Bank Doing Business; Finance: WEF and World Bank Doing Business; Bureaucracy: PRS; Regulations: World Bank Worldw ide Governance Indicators.

19

Key Messages

• The region is facing new, possibly long-lasting, realities.

• Policy responses so far have been partial and focused on the short term.

• Medium-term fiscal consolidation and greater exchange rate flexibility are needed to maintain macroeconomic stabilityflexibility are needed to maintain macroeconomic stability.

• Enhanced policy frameworks would improve shock resilience.

• Structural reforms would enhance long-term growth potential and make it more inclusive.

20

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