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
21
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