From Boom To Bust … and Back.
German-Baltic Chamber of Commerce Riga, March 31, 2011
Mark Allen Senior IMF Resident Representative for Central and
Eastern Europe
The views expressed in this Presentation are those of the author and do not necessarily represent those of the IMF or IMF policy.
2
Scope of the presentation
The Boom Years
Crisis Unfolding
Crisis Response
Recovery
Challenges
3
The Boom Years: Growth and Credit Average Real GDP and Real Credit Growth
0
5
10
15
20
25
30
35
40
45 20
00-0
4
2005
-07
2000
-04
2005
-07
2000
-04
2005
-07
Estonia Latvia Lithuania
GDP Credit
Real Lending Rate
-10
-5
0
5
10
15
2000
M1
2000
M9
2001
M5
2002
M1
2002
M9
2003
M5
2004
M1
2004
M9
2005
M5
2006
M1
2006
M9
2007
M5
2008
M1
Estonia Latvia Lithuania
Source: WEO database; IFS.
4
The Boom Years: Property and Construction
Source: Eurostat
Share in Production Value
0%
5%
10%
15%
20%
25%
2000 2007 2000 2007 2000 2007
Estonia Latvia Lithuania
Real Estate
Construction
5
The Boom Years: Housing Prices
80
100
120
140
160
180
200
220 Estonia Latvia Lithuania Germany
Housing Prices (2005Q1=100, HICP deflated)
Source: Global Property Guide.
6
The Boom Years: Current Account & Foreign Debt
-25
-20
-15
-10
-5
0
2000 2001 2002 2003 2004 2005 2006 2007
Estonia Latvia Lithuania
Current Account Balance (as a percent of GDP)
0
20
40
60
80
100
120
140
Estonia Latvia Lithuania
2004-2007 2003
Gross External Debt (as a percent of GDP)
Source: WEO database, JEDH.
7
The Boom Years: Financial Vulnerabilities
75
100
125
150
175
200
225
250
2003 2004 2005 2006 2007 2008
Estonia Latvia Lithuania
Loan-to-Deposit Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100% Lo
ans
Dep
osits
Loan
s
Dep
osits
Loan
s
Dep
osits
Foreign Domestic Estonia Latvia Lithuania
Currency Structure (end-2006)
Source: Haver.
8
The Boom Years: Fiscal Policy Stance
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
-3 -2 -1 0 1 2 3
Estonia Latvia Lithuania
2000-04
2005-07
2000-04 2005-07
2005-07
2000-04
Average Fiscal Balance (percent of GDP) Aver
age
Cyc
lical
ly-A
djus
ted
Fisc
al B
alan
ce (p
erce
nt o
f G
DP)
Source: WEO database.
9
The Boom Years: Competitiveness ULC-weighted REER appreciation (percent increase from 2000)
Source: Eurostat; WEO database.
-20
-10
0
10
20
30
40
50
60
70
Estonia Latvia Lithuania Germany
2004-2007 2000-2003 2000-2007
10
Crisis Unfolding: Growth and Unemployment Unemployment Rate
(percent)
0
5
10
15
20
25
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2009
Q3
2010
Q1
Estonia Latvia Lithuania
-30
-20
-10
0
10
20
30
40
50
2007 2009 2007 2009 2007 2009
Estonia Latvia Lithuania
Demand Credit
Domestic Demand and Credit Growth (year-on-year percent change)
Source: Haver., WEO database.
11
Crisis Unfolding: Fiscal Pressures
0
2
4
6
8
10
12
14
16
18
20
Estonia Latvia Lithuania
2008: fiscal deficit 2009: deficit before measures
%
Fiscal Balance (percent of GDP)
0
5
10
15
20
25
30
35
40
45
2006 2007 2008 2009 2010
Estonia Latvia Lithuania
Government Debt (percent of GDP)
Source: Haver., WEO database.
12
Crisis Unfolding: Housing Prices
80
100
120
140
160
180
200
220 20
05Q
1
2005
Q2
2005
Q3
2005
Q4
2006
Q1
2006
Q2
2006
Q3
2006
Q4
2007
Q1
2007
Q2
2007
Q3
2007
Q4
2008
Q1
2008
Q2
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
Estonia Latvia Lithuania Germany
Source: Global Property Guide, Haver.
Housing Prices (2005Q1=100, HICP deflated)
13
Crisis Unfolding: Credit and NPLs
-2
0
2
4
6
8
10
12
14
16
18
-10
0
10
20
30
40
50
60
70
80
90 20
05Q
1
2005
Q2
2005
Q3
2005
Q4
2006
Q1
2006
Q2
2006
Q3
2006
Q4
2007
Q1
2007
Q2
2007
Q3
2007
Q4
2008
Q1
2008
Q2
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
Estonia Credit Latvia Credit Lithuania Credit Estonia NPLs (rhs) Latvia NPLs (rhs) Lithuania NPLs (rhs)
Non-performing Loans to Total Loans (percent ) and Credit Growth (year-on-year percent change)
Source: Global Property Guide, GFSR.
14
Policy Response: Internal Devaluation
-40
-20
0
20
40
60
80
Estonia Latvia Lithuania Germany
2008-2010Q2 2004-2007 2000-2003 2000-2010Q2
90
95
100
105
110
115
120
Jan-
2007
M
ay-2
007
Sep-
2007
Ja
n-20
08
May
-200
8 Se
p-20
08
Jan-
2009
M
ay-2
009
Sep-
2009
Ja
n-20
10
May
-201
0 Se
p-20
10
Estonia Latvia Lithuania
ULC-based REER Wages (Jan-07=100)
Source: Eurostat, Haver.
15
Policy Response: Fiscal Adjustment
0
2
4
6
8
10
12
Estonia Latvia Lithuania
Expenditure: Structural Expenditure: Current & Temporary Revenue: Other Revenue: Durable
%
Exp
endi
ture
Re
venu
e
2009 Fiscal Adjustment (percent of GDP)
Source: IMF Staff reports and staff estimates based on country authorities budgets.
16
Policy Response: External Support
Concerted efforts to maintain bank exposure
Swap line with Riksbank (Estonia) IMF and EU program support (Latvia)
17
Recovery: Real GDP Real GDP levels (2000=100)
Source: WEO database.
100
120
140
160
180
200
220
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Estonia Latvia Lithuania
18
Real GDP and Real Domestic Demand levels (2000=100)
Source: WEO database.
100
120
140
160
180
200
220
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GDP levels Domestic Demand levels:
Estonia Latvia Lithuania
Recovery: Domestic Demand
19
Recovery: Unemployment Rate
Source: IMF Staff Reports, IFS
Unemployment rate (percent)
0
5
10
15
20
25 20
07Q
1 20
07Q
2 20
07Q
3 20
07Q
4 20
08Q
1 20
08Q
2 20
08Q
3 20
08Q
4 20
09Q
1 20
09Q
2 20
09Q
3 20
09Q
4 20
10Q
1 20
10Q
2 20
10Q
3 20
10Q
4
2011
2012
Estonia Latvia Lithuania
20
Recovery: Consumer Prices
Source: IMF Staff Reports, IFS
Consumer Price Index (year-on-year percent change)
-10
-5
0
5
10
15
20 1/
1/20
07
3/1/
2007
5/
1/20
07
7/1/
2007
9/
1/20
07
11/1
/200
7 1/
1/20
08
3/1/
2008
5/
1/20
08
7/1/
2008
9/
1/20
08
11/1
/200
8 1/
1/20
09
3/1/
2009
5/
1/20
09
7/1/
2009
9/
1/20
09
11/1
/200
9 1/
1/20
10
3/1/
2010
5/
1/20
10
7/1/
2010
9/
1/20
10
11/1
/201
0 1/
1/20
11
2011
2012
Estonia Latvia Lithuania
21
Recovery: Export led growth
Source: IMF REO, WEO database
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012
Estonia Latvia Lithuania
Real Exports Real Domestic Demand Real GDP
Growth Components (percent change)
22
Recovery: Real Exports
Source: WEO database
100
120
140
160
180
200
220
240
260
280 20
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Estonia Latvia Lithuania
Real Exports of Goods and Services (2000=100)
23 Source: WEO database
Current Account Balance (percent of GDP)
-25
-20
-15
-10
-5
0
5
10
2004 2005 2006 2007 2008 2009 2010 2011 2012
Estonia Latvia Lithuania
Recovery: Current Account Balance
24
Recovery: Market Confidence
0
200
400
600
800
1000
1200
1400
1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011
Estonia Latvia Lithuania
Greece Ireland Portugal Source: Bloomberg.
Credit Default Swaps spreads
25
Challenges: Deleveraging Claims on Private Sector (percent of GDP)
Source: IFS.
0
20
40
60
80
100
120
2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1
Estonia Latvia Lithuania
26
Challenges: NPL Non-performing loans (percent of total loans)
Source: IMF Staff Reports.
0
2
4
6
8
10
12
14
16
18
20 20
08Q
1
2008
Q2
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
2009
Q4
2010
Q1
end-
2010
Estonia Latvia Lithuania
27
-10
-8
-6
-4
-2
0
2
4
0 10 20 30 40 50 60
Estonia Latvia Lithuania
Challenges: Fiscal Consolidation
Source: WEO database.
2000
2000
2000
2012
2012
Fisc
al B
alan
ce (p
erce
nt o
f G
DP)
Public Debt (percent of GDP)
„Maastricht zone”
2012
2007 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012
28
Challenges: Improving Competitiveness
-40
-20
0
20
40
60
80
Estonia Latvia Lithuania Germany
2008-2010Q2 2004-2007 2000-2003 2000-2010Q2
90
95
100
105
110
115
120
Jan-
2007
M
ay-2
007
Sep-
2007
Ja
n-20
08
May
-200
8 Se
p-20
08
Jan-
2009
M
ay-2
009
Sep-
2009
Ja
n-20
10
May
-201
0 Se
p-20
10
Estonia Latvia Lithuania
ULC-based REER Wages (Jan-07=100)
Source: Eurostat, Haver.
29
Challenges: Obstacles to Business
0 10 20 30 40 50 60 70 80
Latvia
Lithuania
Estonia
Germany
Global Competitiveness Index Infrastructure (quality of roads, railroads, ports and air transport infrastructure) Labor market efficiency (ridgity of employment, flexibility of wage determination) Institutions (efficiency of legal framework, strength of investor protection, organized crime) Goods market efficiency (extent and effect of taxation, trade tariffs and barriers)
Estonia
2010-2011
Structural Weaknesses
Source: Global Competitiveness Report.
30
Thank you
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