eastern europe and central asia: economic outlook and challenges ahead istanbul chamber of industry...
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3 I. ECONOMIC OUTLOOKTRANSCRIPT
Eastern Europe and Central Asia:
Economic Outlook and
Challenges Ahead
ISTANBUL CHAMBER OF INDUSTRY - 6th INDUSTY CONGRESS
November 26- 27, 2007
Klaus RohlandCountry Director
2
Main Messages• Strong growth, supported by:
o Domestic factors (policy reforms: macro, structural)o External factors (Trade, FDI)
• Short-term challenges:
o Macro vulnerabilitieso Financial sector vulnerabilities
• Medium-term challenges:
o Boost productivity to maintain competitiveness, spur innovation and sustain economic growth
o Unfinished structural reform agenda:
o Stronger investment climate; export sophistication (higher added value products); deeper financial markets
3
I. ECONOMIC OUTLOOK
4
Economic Expansion Continues…
GDP Per Capita (Constant 2000 USD) 2001-2006
0
1000
2000
3000
4000
5000
6000
7000
EU-10 SEE Middle Income CIS Low Income CIS Russia Turkey
2001
2004
2006
Real GDP growth(2001=100)
100
110
120
130
140
150
160
170
2001 2002 2003 2004 2005 2006
EU-10 SEE CIS MID CIS LOW Turkey Russian Federation
5
Poverty Has Fallen in most countries
Poverty Rate, $PPP 2.15 per day(Fraction of Individuals Below the Poverty Line)
0
10
20
30
40
50
60
EU-10 SEE Middle Income CIS Low Income CIS Russia Turkey
2001 or earliest available yearlatest available year
6
Strong Productivity Growth is Driving the Economic Expansion…
Labor Productivity Growth drives per capita
output growth in most countries
Sources of output per capita growth in ECA (1999-2004)
(3.7)
(7.3)
(6.5)(2.6)
(1.4)
(-2.8)
(3.1)(4.0)
(-5.9)
(-3.2)
-8
-6
-4
-2
0
2
4
6
8
10
1993-1998 1999-2004 1990-1998 1999-2004 1993-1998 1999-2004 1993-1998 1999-2004 1996-1998 1999-2004
EU-10 Turkey CIS-Mid CIS-Low SEE
Gro
wth
(%)
Output per Worker Employment to Working PopulationWorking population to Total Population Output per Capita Growth in Brackets
7
Output Growth Was Supported by Domestic Policies…
Fiscal Balance (Pct of GDP) 2001-2007
-10
-8
-6
-4
-2
0
2
4
6
8
EU-10 SEE Middle Income CIS Low Income CIS Russia Turkey2001
2004
2007
-18
Prudent Fiscal Policies Helped Improving Fiscal
Balances
8
… And Progress in Structural Reforms
Enterprises
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
EU-10 SEE CIS Mid CIS Low Russia
2001 2004 2007
Banking reform
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
EU-10 SEE CIS Mid CIS Low Russia
2001 2004 2007
Trade and Foreign Exchange
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
EU-10 SEE CIS Mid CIS Low Russia
2001 2004 2007
Overall infrastructure reform
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
EU-10 SEE CIS Mid CIS Low Russia
2001 2004 2007
Source: EBRD Transition reportsNote: The measurement scale for the indicators ranges from 1 to 4+, where 1 represents little or no change from a rigid centrally planned economy and 4+ represents the standards of an industrialized market economy. The infrastructure reform ratings are calculated as the average of five infrastructure reform indicators covering electric power, railways, roads, telecommunications, water and waste water. The enterprise ratings are calculated as the average of large and small scale privatization, and enterprise restructuring. The market and trade ratings are calculated as the average of price liberalization, trade&forex system and competition policy. The financial institutions ratings are calculated as the average of banking reform & interest rate liberalization and securities markets & non-bank financial institutions.
9
External Factors Also Contributed to the Economic Expansion
Total Trade (as % of GDP PPP)
0
5
10
15
20
25
30
35
40
45
50
EU-10 Turkey SEE CIS-middle CIS-low
% o
f GD
P PP
P
1994-1998
1999-2005
FDI Inflow (in % of GDP PPP)
0
0.5
1
1.5
2
2.5
3
EU-10 Turkey SEE CIS-middle CIS-low
% o
f GD
P PP
P
1994-1998
1999-2005
Source: Bank staff calculations; UN-Comtrade, 2007
Trade and FDI flows increased across the region, contributing to the economic expansion
10
Overall, Much Progress Achieved But Further Reform Efforts are Needed
II. CHALLENGES AHEAD
11
Short-term Challenges: Macro Vulnerabilities Remain…
Current Account Balance (Pct of GDP) 2001-2007
-15
-10
-5
0
5
10
15
EU-10 SEE Middle Income CIS Low Income CIS Russia Turkey
2001
2004
2007
Large current account deficits (except in resource-rich countries), inflationary pressures and real exchange rate appreciation are also an
issue of concern…
Source: IFS, Central Bank of Turkey, National Bank of KazakhstanNotes: *For Kazakstan, December 2000=100
Real Exchange Rates
Real Exchange Rates: June 2005 - May 2007
80
90
100
110
120
130
140
150
160
170
180
Jun-
05Ju
l-05
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06Fe
b-06
Mar
-06
Apr
-06
May
-06
Jun-
06Ju
l-06
Aug
-06
Sep
-06
Oct
-06
Nov
-06
Dec
-06
Jan-
07Fe
b-07
Mar
-07
Apr
-07
May
-07
2000
ave
rage
=10
0*
Ukraine PolandRomania Russian FederationTurkey Kazakhstan
12
Short-term Challenges: Financial Sector Vulnerabilities
Domestic Credit to the Private Sector (Pct of GDP), 2001-2006
0
10
20
30
40
50
60
EU-10 SEE Middle Income CIS Low Income CIS Russia Turkey
2001
2004
2006
Rapid Credit Growth has led to Higher Exposure to Financial Risks: (risk (maturities shortened, portfolio risks increased, risk premia and interest rates
rose) calling for stronger financial supervision
13
Medium-Term Challenge: Boosting Productivity Growth
Income per capita, 1999-2005
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
Low-CIS Mid-CIS SEE Turkey EU-10
GDP
per
cap
ita, P
PP (c
urre
nt in
tl $)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Ratio to EU-15Even in the EU Accession countries income per capita is less than half the
EU-15 average. Productivity Growth can accelerate income convergence and improve competitiveness…..
14
Boosting Productivity Growth Calls for Further Progress on Structural Reforms
STRONGER INVESTMENT CLIMATE:Reduce barriers to firm entry, exit and expansion (reducing
regulatory burden, reforming tax systems, and increasing labor market flexibility)
Doing business, 2007
0
10
20
30
40
50
60
70
80
90
100
Procedures(number)
Time (days) Nonwage laborcost (% of
salary)
Firing costs(weeks of
wages)
Total tax rate(% profit)
Time (years)
Starting business Employing workers Closingbusiness
EU-10SEECIS MIDCIS LOWTurkeyRussian FederationEU-15
Share of Medium and High Tech Products in Total Exports (%)
0
5
10
15
20
25
30
35
40
EU-10 Turkey SEE CIS-mid CIS-low
1995-1998 1999-2005
Higher export sophistication (higher value added products) and deeper financial markets are needed to
spur innovation and boost productivity growth
15
Conclusions
• Strong economic growth, driven by domestic reforms and greater integration into global markets
• But further progress in structural reforms is needed to boost productivity growth, maintain competitiveness and spur innovation
16
Thank you for your attention