Regional Economic OutlookCaucasus and Central Asia

October 21, 2016

Outline

2

Policy Priorities

Outlook and Policy Actions

Global and Regional Environment

3

Global growth remains lackluster

World U.S. Euro Emerging China RussiaArea markets

2015 3.2 2.6 2.0 4.0 6.9 -3.7

2016 3.1 1.6 1.7 4.2 6.6 -0.8

2017 3.4 2.2 1.5 4.6 6.2 1.1

Risks are to the downside―more pronounced from inward-looking policies and secular stagnation, less so from emerging markets

4

Oct 2016 GFSR Apr 2016 GFSR

Credit risks

Emerging market risks

Market and liquidity risks

Macroeconomic risks

Monetary and financial conditions

Risk appetite

Global Risks

Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.Source: IMF GFSR report.

World GDP Growth(Percent change)

Source: World Economic Outlook.

0

1

2

3

4

5

6

2013 2014 2015 2016 2017

50 percent confidence interval

70 percent confidence interval

90 percent confidence interval

5

Commodity prices are expected to remain weak

Brent Crude Oil Price (U.S. dollars per barrel)

Commodity Prices(Index, June 2011=100)

Sources: Bloomberg; and IMF staff calculations.

0

20

40

60

80

100

120

140

2011 2012 2013 2014 2015 2016 2017 2018 201995% confidence interval 86% confidence interval68% confidence interval Brent Futures

WEO Baseline AverageOil Price:2016: $432017: $512020: $56

20

30

40

50

60

70

80

90

100

110

120

2011 2012 2013 2014 2015 2016 2017 2018

Copper

Alumnium

Gold

Cotton

6

Despite some improvement, the outlook for CCA’s key export markets remains weakReal GDP Growth(Percent)

Exports by Destination(Share of Total Exports)

0%10%20%30%40%50%60%70%80%90%

100%

ARM GEO KGZ TJK AZE KAZ UZB TKM

Russia China Euro areaCIS excl. Russia Other

-6

-4

-2

0

2

4

6

8

10

12

Euro area Russia China

2001-14 average

2015

2016

2017-21 average

7

Policy Priorities

Outlook and Policy Actions

Global and Regional Environment

8

Regional growth sharply weakening, with a modest recovery projected for 2017

Real GDP Growth (Percent)

-4

-2

0

2

4

6

8

10

2000-14 2015 2016 2017

CCA Oil Exporters Oil Importers

AZEKAZ

TKMUZB

ARM

GEO

KGZ

TJK

AZE

KAZ

TKM

UZB

ARMGEO

KGZ

TJK

-4

-2

0

2

4

6

8

10

2016 2017

9

Exports and remittances are key channels through which external conditions affect regional growthTotal Exports(Billions of USD)

Remittances(Jan 2011 = 100)

10

15

20

25

30

0

20

40

60

80

100

120

140

160

180

2011 12 13 14 15 16 17

CCA Oil ExportersCCA Oil Importers (RHS)

100

120

140

160

180

200

220

240

260

280

11 12 13 14 15 16

Rubles

National Currency

US Dollars

2011

10

Budgetary support has helped economic activity

Oil Exporters: Government Expenditure(Percent of Non-oil GDP)

Oil Importers: Government Expenditure(Percent of GDP)

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

0

10

20

30

40

50

60

70

AZE KAZ TKM-10-8-6-4-20246810

05

101520253035404550

ARM GEO KGZ TJK

11

Public debt and adjustment needs have risen

Illustrative Fiscal Adjustment Needs in Oil Exporters(Percent)

1/ This is the gap between the projected nonhydrocarbon primary balance and the desirable fiscal balance based on a permanent income hypothesis.

Public Debt(Percent of GDP)

0

5

10

15

20

25

30

35

40

AZE KAZ

Decrease in spending needed tobalance 2016 budget (percentchange)

Distance to intergenerationally-neutral fiscal balance (2016,percent of non-oil GDP) 1

0

10

20

30

40

50

60

70

80

ARM GEO KGZ TJK AZE KAZ TKM UZB

Change 2014– 16

2014

12

Exchange rate policy has also been a useful tool for coping with the shocks

40

50

60

70

80

90

100

110

Oil Exporters(U.S. dollars per national currency, January 2010 = 100)

AZE KAZ TKM UZB

40

50

60

70

80

90

100

110

Oil Importers(U.S. dollars per national currency, January 2010 = 100)

ARM GEO KGZ TJK

13

Currency adjustment has helped unwind previous real appreciations, but temporarily increased inflation

Nominal Effective Exchange Ratesand Inflation

(Percent)

Real Effective Exchange Rates(Percent Change, Trough to Peak or vice versa)

ARM

GEOKGZ

TJK

AZE

KAZ

TKMUZB

–50

–40

–30

–20

–10

00 10 20 30 40 50

Post

-sho

ck D

epre

ciat

ion

Pre-shock Appreciation

45 degree line

real appreciation

real

dep

reci

atio

n

ARM

GEOKGZ

TJK

AZE

KAZ

TKM

UZB

-2

0

2

4

6

8

10

12

14

-10 0 10 20 30 40 50

Infla

tion

in 2

016

Nominal effective exchange depreciation(Percent change, peak to trough in REER)

14

Financial vulnerabilities have risen amid weaker currencies and slowing economic activity

-15

-10

-5

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

Credit Deposits

Private Credit and Deposits (Percent Change)

Note: Adjusted for exchange rate effects. Data not available for Turkmenistan and Uzbekistan.

Non-performing Loans(Percent of Total Loans)

Note: NPLs in Azerbaijan include only the overdue portion of the loans. In Kazakhstan, the reduction reflects the de-licensing of a bank with significant NPLs and legislation changes allowing banks to move NPLs to a Special Purpose Vehicle. Turkmenistan's data are not available.

0

5

10

15

20

25

30

3520132014Latest

Risks to the outlook are tilted to the downside

Further weakening of prices for oil and other commodities

Weaker growth in trading partners (Russia, China, Europe)

Increase in global risk aversion and financing costs

15

Increase in global protectionism and/or Slower domestic reforms

16

Policy Priorities

Outlook and Policy Actions

Global and Regional Environment

17

Fiscal • Continue to support growth in the near term if budget space and

buffers allow• Develop credible medium-term consolidation plans to ensure

sustainability

Monetary • Focus on inflationary pressures taking into account growth and financial

stability• Strengthen monetary and exchange rate frameworks

Financial Sector • Improve supervision, macro-prudential policies, and crisis management

frameworks

Macroeconomic and Financial Policy Priorities

18

Without reforms, medium-term growth prospects and gains in living standards will be slow

GDP per Capita(In Percent of Emerging Market Average)

Real GDP Growth(Percent)

Note: GDP per capita in 2022-2035 is expected to growth at the same rate as 2021.

0

2

4

6

8

10

12

14

–2 –1 0 1 2 3

Russian crisis (1998 = 0)

Global financial crisis (2009 = 0)

Current recovery (2016 = 0)

30

35

40

45

80

90

100

110

120

1995 2000 2005 2010 2015 2020 2025 2030 2035

Oil Exporters Oil Importers (RHS)

19

Need to change growth models: diversify away from commodities & remittances, make growth inclusive

Oil Exports and Remittances(2015, Percent)

Poverty Rates(Percent)

0

10

20

30

40

KGZ TJK ARM UZB GEO AZE KAZ0

10

20

30

40

50

60

70

80

90

100

AZE KAZ TKM UZB ARM GEO KGZ TJK

Oil exports as a share of totalexports

Remittances as a share of GDP

20

Accelerating structural reforms remains key to unlocking growth potential

Structural Reform Indicators(In Global Percent Rank)

0%

20%

40%

60%

80%

100%

EducationQuality

FinancialServices

Control ofCorruption

ExportDiversity

ExportIntegration

Doing Business

Emerging Market Averages

Sources: Education Quality: Global Competitiveness Report; Financial Services: Global Competitiveness Report and Doing Business; Control of Corruption: Worldwide Governance Indicators; Export Diversity: IMF/DFID Export Diversity Index; Export Integration: World Economic Outlook; and Doing Business: Doing Business Report.

Key Takeaways• Commodity prices and growth in key trading partners are set to

remain low in the coming years. • A weak and fragile recovery is projected, amid subdued external

environment, rising vulnerabilities, and lower policy space.• Countries with buffers can support growth in the short run, but

multi-year fiscal consolidation plans are needed to ensure debt sustainability.

• Stronger monetary policy frameworks and improved financial supervision can support more flexible exchange rates and reduce risks to inflation and financial sector stability.

• Structural reforms are needed to boost medium-term growth prospects, improve living standards, and create jobs.

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