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The global financial crisis: Possible effects on the RBEC region Ben Slay RBEC senior economist 15 December 2008.

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Presentation on theme: "The global financial crisis: Possible effects on the RBEC region Ben Slay RBEC senior economist 15 December 2008."— Presentation transcript:

1 The global financial crisis: Possible effects on the RBEC region Ben Slay RBEC senior economist 15 December 2008

2 Presentation topics n Regional economic growth trends –Poverty reduction implications n Global financial crisis: –How will it affect our region? –What risks? For whom? n Effects on development environment –UN system, UNDP –Bretton Woods institutions

3 Regional growth trends: Drama in three acts Unweighted average annual GDP growth rates, national data

4 Drivers of growth n “Recovery growth”—bouncing off the bottom –End of armed conflicts of early 1990s –Benefits of macro stabilisation, market reforms –Unemployed resources being put to work n Favourable global trends: –Growth in world trade –Higher export prices, especially for CIS countries –“Emerging market” conditions very positive n Favourable regional trends: –“Convergence growth” (vis-à-vis EU) –Special role of Russia

5 Growth: Good for poverty reduction n World Bank data show that, between 1998-99 and 2005-06: –Those living in poverty fell by 50 million –Those vulnerable to falling into income poverty fell by 48 million n Only one person in eight living in absolute poverty Source: Alam, Sulla, Yemtsov, “Income Poverty in ECA: An Update”, World Bank, 4 April 2008

6 Poverty rose during, after 1997-1998 financial crises Absolute income poverty, measured against $PPP2.15/day threshold. World Bank data.

7 Growth, poverty, and human development n Reductions in income poverty are good— especially as a proxy for human development –Non-income dimensions of poverty n Health n Education n Equality –Development: Choices, freedoms, opportunities n UNDP’s human development index measures: –Per-capita GDP (in PPP terms) –Education attainment –Life expectancy

8 Global crisis arrives: Emerging markets tank... Year-to-date change in stock market indices, through mid-October. Source: JPMorgan

9 ... IMF sees recessions, growth slowdowns... IMF sees recessions, growth slowdowns Annual GDP growth, IMF data, forecasts. Sources: IMF World Economic Outlook, October 2008; other IMF publications

10 Contagion: Four key transmission mechanisms n Trade shocks: –Prices (terms of trade effects) –Quantities (falling export demand) n Financing gaps will be harder to fill n Inter-, intra-bank inflows may reverse n Falling remittances

11 Terms of trade shock: Exports prices collapsing World oil prices have dropped by two thirds since mid-2008 Lower food, oil prices will help SEE, NMS, but not most CIS countries

12 Share of exports going to EU-27 UNDP estimates, based on IMF data

13 Share of exports going to Russia EIU 2007, 2008 data

14 Financing gap: Needs that can’t be met by borrowing n Two key forms: –Large current account deficits –Large external repayments –Or both n Big problem now, when capital markets are closed to most developing, transition economies

15 Current account balances Shares of 2007 GDP, EIU data. No refinancing issues Significant refinancing issues could be present. Much depends on FDI, concessional finance (IMF) Significant refinancing issues are present

16 External debt: Repayment without refinancing?? In billions. Sources: JPMorgan, EIU

17 Remittances: Who’s most at risk? Remittances as % of GDP. Source: World Bank

18 Special economic role of Russia n Trade flows: –Russian imports from other CIS countries more than tripled during 2000-2007 –Subsidised energy imports, manufacturing exports n Russian assets in other CIS countries: $33 billion (end-2007) n Annual service exports (transport, finance, tourism): $8 billion in 2007 n Remittances (wages, transfers) from Russia to other CIS countries: $14 billion in 2007 Source: Central Bank of Russia

19 Financial crisis: Is Russia in serious trouble? n Central Bank reserves are melting n Markets in free fall n Big declines in export prices n Growing signs of distress in oil, metals, mining sectors –Lay-offs –Electricity arrears n Smaller banks going under, being merged n S&P ratings downgrades: –23 October –8 December In billions. CBR data

20 On the other hand... n $80 billion in off-shore national wealth, reserve funds untouched n Bailouts offered: –€4 billion to Iceland –$2 billion to Belarus n No sign of slowing growth in GDP, remittances during first half of 2008 n Kazakhstan example: Russia can survive poor external refinancing prospects for some time n Opportunity to further strengthen state ownership? –Government has put $200 billion to support Russian economy at disposal of 3 largest state-owned banks

21 Good news: Remittances from Russia still growing... Wages and transfers paid out to other CIS countries, in millions, first-half data. Source: Central Bank of Russia.

22 ... But not from Kazakhstan Wages and transfers paid out to other CIS countries, in millions, first- half data. Sources: National Bank of Kazakhstan, UNDP estimates.

23 Regional inflation trends n Accelerated during 2007-2008 –Much worse in CIS than elsewhere –Driven by higher food, energy prices n Can increase poverty even without causing a recession: –Poorer households’ nominal wages, social benefits may not keep up with inflation –Governments may have to tighten fiscal, monetary policies

24 Accelerating inflationary pressures... Consumer price inflation. 2008 data are for January-September. Sources: CIS Statistical Office, EIU.

25 ... Aggravate food insecurity n Tajikistan: 2.2 million food insecure –34% of rural population –37% of urban population –800,000 severely food insecure, requiring immediate support n Kyrgyzstan: Nearly 1 million vulnerable n Sources: –Tajikistan: WFP, FAO, UNICEF Joint Food Security Assessment (May, July 2008) –Kyrgyzstan: UN Winter Preparedness Response Plan (October 2008)

26 Impact on the development environment n ODA flows? n Donor landscape? n New development paradigms? n Role of: –Bretton Woods institutions –United Nations

27 Whither ODA flows? n Bad news: –OECD-DAC ODA falling before global financial crisis hits –Further reductions in 2009-2010? n Good news: –2005-2007 decline due to less debt relief –Decline partly offset by growing ODA flows from non-DAC donors Annual OECD-DAC ODA flows, in billions. Source: OECD-DAC

28 Possible changes in donor landscape n Role of OECD-DAC donors will decline n Role of new donors, “south-south” cooperation will increase n Whither the Paris Declaration? –“Conditionality” principles will weaken, role of national ownership strengthen –But: n “Donor space” will fragment further n Donor coordination will become more difficult

29 Search for new development paradigms n Global financial crisis is discrediting “neo- liberalism”, “Washington consensus” n But what’s the alternative? –Especially for developing countries without large foreign exchange reserves? n “Globalisation” hasn’t gone away n Changes in state/market relations in OECD countries may not easily transfer –Bank nationalisation in US, Europe doesn’t change need for private sector investment in developing countries

30 What happens to Bretton Woods institutions? n Two key, related questions: –Riding to the rescue... or to irrelevance? –Who will pay for an expanded role? n Especially important for IMF

31 BWIs: Emerging institutional imbalances n Demand side: Possible new global roles –Lender of last resort? –Overseer of financial reregulation? n Supply side: Business models under attack as MICs proliferate –Capital markets were making BWIs irrelevant –Will MIC capital market access weaken? n Who will provide capital infusions for BWIs? n Will China, Gulf states invest in: –Bretton Woods institutions (multilateralism)... –... Or sovereign wealth funds (bilateralism)?

32 Opportunities for UN(DP): Can we link: n Macro level policy dialogue (around PRSPs)... –... Especially capacity development for broader participation in macroeconomic policy discussions n With local development/ABD programming... –... Especially collection, analysis of poverty data disaggregated by vulnerability criteria (e.g., gender, location, age, ethnicity) n With broader socio-economic/environmental risk management... n... And with “economic governance” programming, reflecting the: –Need for more effective social policy? –Changing balance between the state and the market?

33 Threats for UN(DP) n IMF, World Bank positions will strengthen –Effective cooperation, especially with the Bank? –In non-PRSP countries? n Climate change/carbon finance—Will the urgency weaken with: –Global recession –Low energy prices –Will “cap and trade” survive the “flight from derivatives”? n Will governments conclude that reform is the problem, not the solution? n Whither the EU anchor?

34 Thank you very much!

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