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The Black Sea Trade and Development Bank The Forgotten Neighborhood: An Overview of Economic And Regional Trends Around the Black Sea Fifth International.

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Presentation on theme: "The Black Sea Trade and Development Bank The Forgotten Neighborhood: An Overview of Economic And Regional Trends Around the Black Sea Fifth International."— Presentation transcript:

1 The Black Sea Trade and Development Bank The Forgotten Neighborhood: An Overview of Economic And Regional Trends Around the Black Sea Fifth International Black Sea Symposium The Black Sea Region as an Influential Crossroad Between East and West: A Path Towards Extroversion Athens, 4 July 2012

2 Outline of Presentation Overview of Economic Situation in the Black Sea Region Outlook for Region & Key Challenges Black Sea Regionalism and the EU 2

3 : High growth; 2009: Negative; 2010 &11: Recovery; 2012: ? 3

4 Regional Trends: Before Economic Crisis High growth despite diversity of economies- all countries experience positive growth Between annual real GDP growth averages 5.9% Living standards/ per capita income rise, poverty rates decline sharply Private capital flows increase- esp. FDI over 4% GDP Intra-Regional trade, investment, financing, also increase 4

5 Financial Crisis /08- Global markets freeze, financing disappears Govts, banks, firms dependent on external financing face liquidity crunch Regional financial systems face loss of confidence- Governments support successfully at high cost Financial systems relatively small - therefore damage less than elsewhere in E. Europe. For most part in Black Sea Region financial crisis limited- Ukraine an exception Black Sea Region mainly suffered a short but sharp Economic crisis 5

6 Economic Crisis in Black Sea Credit to businesses & consumers disappeared reducing liquidity & demand, slowing investment International trade flows dropped, exports down, contraction in key W. European markets Problems exacerbated by declines in (i) commodity prices, (ii) remittances, (iii) sundry external receipts Reversal of fortune- poverty/ unemployment/ fiscal deficits up; current account deficits/ trade flows/ inflation down Painful adjustment process only course for most 6

7 Why was Black Sea (& C/E Europe) Highly Vulnerable? Pro-cyclical fiscal policy- deficits maintained during rapid economic growth added an unnecessary stimulus which (i) overheated the economy and (ii) made it difficult to counteract the downturn with increased public spending and/or tax cuts, Large current account deficits Private sector foreign financed domestic demand Lack of a domestic capital base and/or of domestic champions able to compete internationally General dependence on/ vulnerability to continued flow of external financing 7

8 Silver linings to the crisis Aside from Greece, not a debt crisis. In most countries debt levels low &debt servicing comfortable Nasty recession but speedy recovery Governments responded promptly and substantively to support banking systems Vienna Initiative to refinance/ recap banks IMF programs in many countries: Armenia, Greece, Georgia, Moldova, Romania, Serbia, Ukraine- some ongoing, some stalled, some replaced by new FDI slow to recover, but still at % of GDP 8

9 BSEC Region in a very difficult year 9 GDP GrowthInflation Cur Acc Bal / GDPBudget/GDP Public Debt/GDP Albania 3.3%2.3%-15.2%-7.0%59.8% Armenia -14.2%3.4%-15.8%-7.5%40.6% Azerbaijan 9.3%1.5%23.0%6.6%12.1% Bulgaria -5.5%2.8%-8.8%-0.9%15.6% Georgia -3.8%1.7%-11.6%-7.7%37.0% Greece -3.3%1.2%-11.2%-15.6%129.5% Moldova -6.0%0.0%-9.8%-6.4%32.4% Romania -7.1%5.6%-4.2%-7.3%23.9% Russia -7.8%11.7%4.0%-6.3%8.3% Serbia -3.5%8.4%-7.1%-4.8%38.2% Turkey -4.8%6.3%-2.2%-5.5%46.4% Ukraine -14.8%15.9%-1.5%-3.8%34.8%

10 BSEC Region in Recovery 10 GDP GrowthInflation Cur Acc Bal / GDPBudget/GDP Public Debt/GDP Albania 3.9%3.6%-11.7%-3.1%58.2% Armenia 2.1%8.2%-14.7%-4.9%44.0% Azerbaijan 5.0%5.7%28.4%14.0%11.4% Bulgaria 0.4%2.4%-1.5%-4.0%17.4% Georgia 6.3%7.1%-11.4%-6.6%42.0% Greece -3.5%4.7%-10.3%-10.5%144.8% Moldova 7.1%7.4%-9.8%-2.5%30.2% Romania -1.3%6.1%-4.4%-6.4%31.7% Russia 4.3%6.9%4.8%-3.5%9.4% Serbia 1.0%6.5%-7.7%-4.8%44.9% Turkey 9.2%8.6%-6.4%-3.6%43.0% Ukraine 4.1%9.4%-2.2%-5.9%39.6%

11 BSEC Region in New Normal? 11 GDP GrowthInflation Cur Acc Bal / GDPBudget/GDP Public Debt/GDP Albania 1.6%3.5%-12.2%-3.4%59.4% Armenia 4.6%7.7%-10.9%-2.9%49.0% Azerbaijan 0.1%7.9%27.0%13.3%12.0% Bulgaria 1.7%4.2%0.9%-2.0%17.5% Georgia 7.0%8.5%-12.5%-3.2%43.6% Greece -6.9%3.3%-9.8%-9.2%162.5% Moldova 6.4%7.6%-12.6%-2.4%29.6% Romania 2.5%5.8%-4.5%-4.1%34.5% Russia 4.3%8.4%5.3%1.6%8.2% Serbia 1.6%11.0%-9.7%-5.1%44.1% Turkey 8.5%6.5%-10.0%-1.3%42.6% Ukraine 5.2%8.0%-5.5%-1.4%38.0%

12 The Black Sea Region in Most countries recover and post real growth Credit flow restarts, unsteadily & at higher cost Consumption recovers more quickly than investment (domestic and FDI) Export recovery- roughly to levels Turkey and Russia emerge as key drivers of growth EU members relative laggards- Greece an outlier Unemployment still high Inflation comes and goes Fiscal deficits declining 12

13 Fiscal Balances- Slow Recovery from Downturn Deterioration Sources: National Statistical Agencies, IMF-IFS & EIU 13

14 FDI in the Black Sea Region Since 2000 Sources: National Statistical Agencies, IMF-IFS & EIU 14

15 Outlook for Black Sea Region Contraction over for all except Greece; positive growth to continue in Appear to be on new track: 3-4% annual real GDP Growth. Less than previous 6% but re-starts convergence to W. Europe levels. High investment needs in infrastructure over next decade- looming bottleneck in many countries Investment slow to return so far, & need to improve business environment, but relocation of EU production capacity to Region likely to continue 15

16 Long Term Regional Prospects Mostly Positive Proximity to wealthy markets of W. Europe Quality of business environment favorable & improving High quality of human capital at relatively low cost Experience, flexibility & resilience in dealing with crises & taking difficult measures Financial sectors small. thus, less damage to economy, and have room for organic growth 16

17 Key Risks Exogenous shocks (commodity, finance, geopolitics, etc.) Governance & rule of law issues Infrastructure quality poor; looms as bottleneck to continued growth Uncertain EU-Black Sea relations, esp. with Russia Risk of contagion from Eurozone crisis High external financing needs make Region vulnerable to market upheavals & liquidity crunches Dependence on W. Europe for absorption of exports Potential for the Euro crisis to spread to the Regions banking sectors- Is foreign ownership a source of stability or instability? 17

18 Capital Flows to Emerging Europe- Some Recovery, Much Uncertainty Source: International Institute of Finance 18

19 Key Regional Challenges for Future Sustaining Economic Growth- (i) maintaining stability, (ii) increasing productivity, (iii) reduce poverty & achieve convergence Evolution of Political Economy Relations with EU- more complicated than ever Managing Uncertainty & Reducing Vulnerability Also: Long Term Demographic trends: (i) need to adapt structurally, (ii) workforce implications, (iii) fiscal pressures Environmental issues: (i) impact on quality of life, (ii) the implications of global accords on local economic activity 19

20 Managing Uncertainty & Reducing Vulnerability Easier diagnosed than cured Array of economic risks beyond access to finance: geopolitics, food security, commodity prices & availability (inc. energy), environmental questions, etc. Even though Russia & Turkey are in G20, Region is a taker in policy terms, not a maker Nascent but dangerous trend to protectionism & isolationism- food export bans, gas flow cuts capital restrictions, exchange rate manipulation 20

21 Can Regional Cooperation Mitigate Risks & Offer Outlet? No panacea, but room for growth in investment, trade & financing: Many Win – Win possibilities exist Potential gains are higher for small/ medium countries that need openness to grow Can expand market reach of banks & firms Official cooperation usually leads (e.g. EU accession activities) but real take-off from private linkages Benefits for competitiveness & sustainability- local and more firmly established, less contagion sensitive 21

22 Can Regional Cooperation Mitigate Risks? Prospects not favorable Lack of political commitment- there are forums for dialogue and information sharing, but limited prospects for policy harmonization, resource pooling, or common institutions Economic difficulties an obstacle Intensifying bilateral rivalries EU influence- (i) Diverts country focus to west, (ii) Rules & restrictions hurt Black Sea cooperation prospects 22

23 Regional Trade: Setback in 2009, Partial Recovery in 2010 Sources: National Statistical Agencies 23

24 Regional Relations with EU- Why Important? Most important external economic actor, directly & indirectly, high externality impact Main market for trade, investment, finance Key exporter of rules, regulations, standards Steady expansion of engagement with Black Sea up to 2009, politically and economically. Negative impact on Regional Cooperation despite BSS & EaP. Mainly engages countries Bilaterally 24

25 EU & Black Sea in the Crisis In Crisis, little direct aid to- or cooperation with- Black Sea. No Eurobonds, Financial Stability Fund, Institutional Mechanisms, etc…… However, HUGE indirect involvement: (i) IMF funding, (ii) ECB operations through Eurozone based banks, (iii) Operations of EIB, etc. WHY? Quicker delivery mechanisms of proxies Fear of setting precedents by direct engagement? Lack of internal consensus on what to do? 25

26 EU & Black Sea Post-Crisis The Eurozone crisis- esp. the Greek question- consumes most EU attention EU unwilling/ unable to consider new initiatives Internal EU discord, esp. over Russia & Turkey Existing initiatives confused and undermine each other: BS Synergy vs. E. Partnership IFIs (EIB & EBRD) very active, but EC resources uncertain, cannot just throw money Eurozone expansion (Bul/Rom) & EU expansion (Tur/ Srb/ Alb/ ENPs?) Uncertain Impact of Arab Spring? 26

27 EU & Black Sea Future Uncertain Critical importance of EU-Russia relations Much uncertainty as to future. No clear EU policy, Black Sea states wish closer engagement Lack of EU Perspective & EU 27 growing pains hurt image & attractiveness of EU Compounded by view that crisis imported from West + perception of EU disappearance Popularity of waxed in 08-09/ wanes with Euro- zone crisis. In Black Sea predominant in west & Turkey (EU Ins), US$ in east (EU outs). 27

28 What the EU Can Do EU membership perspective is the most effective cooperation enhancing policy In its absence, EUs IPA programs a useful model for considering cooperation initiatives in Black Sea (and elsewhere). EU can do much better job supporting locally developed cooperation initiatives such as BSEC EU can also do better job of not undermining itself- BS Synergy vs. EaP 28

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