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The Global and Serbia’s EconomyLecture at the Economic Faculty
Belgrade, May 22, 2012
Bogdan Lissovolik IMF Resident Representative for Serbia
OutlineOutline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
OutlineOutline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
WHAT IS IMF ? GLOBAL MEMBERSHIPWHAT IS IMF ? GLOBAL MEMBERSHIP
187 COUNTRIES REPRESENTEDNON-MEMBERS INCLUDE: CUBA, NORTH KOREA, ANDORRA, MONACO, NAURU, LIECHTENSTEIN
187 COUNTRIES REPRESENTEDNON-MEMBERS INCLUDE: CUBA, NORTH KOREA, ANDORRA, MONACO, NAURU, LIECHTENSTEIN
MANDATE: GLOBAL ECONOMIC & FINANCIAL STABILITYMANDATE: GLOBAL ECONOMIC & FINANCIAL STABILITYSHORT-TERM BALANCE OF PAYMENT SUPPORTFACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOMESHORT-TERM BALANCE OF PAYMENT SUPPORTFACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOME
PILLAR OF MULTILATERALISMPILLAR OF MULTILATERALISMPROMOTES ECONOMIC COOPERATIONCOMPLEMENTS THE UN, WORLD BANK, WTO & ILOPROMOTES ECONOMIC COOPERATIONCOMPLEMENTS THE UN, WORLD BANK, WTO & ILO
Where are we?Where are we?
Output Growth, 2011Q4
Where are we?Where are we?
Public Debt(% of GDP)
Where are we?Where are we?
10-Year Government Bond Yields
Where are we?Where are we?
Capital Flows to Emerging Markets and Developing Economies($US billion; weekly)
Greece Crisis
Ireland Crisis
ECBLTRO
Where are we?Where are we?
Unemployment rates
OutlineOutline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
Where are we going?Where are we going?
Output Growth, 2012-13
Where are we going?Where are we going?
The Brakes: Fiscal Consolidation(change in the structural balance; percentage points of potential GDP)
The Brakes: Bank Deleveraging
Where are we going?Where are we going?
Projected Fall in Bank Lending Supply, 2012-13
Effect of Deleveraging on Output Level(% deviation from no-deleveraging scenario)
What Are The Drivers Of Bank Deleveraging?
Structural drivers…
• Balance sheet clean-up and shedding of legacy assets• Better capitalization• Reduce reliance on less stable funding sources
. . . shaped by cyclical financial and macro conditions
• Under adverse conditions capital generation more difficult• Funding pressures could also place strains on banks
10
Where are we going?Where are we going?
Real GDP Growth
Sept. 2011 WEO
Sept. 2011 WEO
Advanced Economies Emerging and Developing Economies
OutlineOutline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
What are the risks?What are the risks?
RISK 1:RISK 1:Euro Area Euro Area
CrisisCrisis
RISK 2:RISK 2:Oil PricesOil Prices
BANKSBANKS
viciouscycles
FISCALFISCAL
GROWTHGROWTH
What are the risks?What are the risks?
BANKSBANKS
viciouscycles
FISCALFISCAL
GROWTHGROWTH
What are the risks?What are the risks?
What are the risks?What are the risks?
Exports of Goods to the Euro Area
(2010)
Euro Area Bank Claims(% of GDP; Sep. 2011)
Eu
roA
rea
Em
ergi
ng
Eu
rop
e
Oth
er A
dv.
E
uro
pe
CIS
ME
NA
SS
A
Dev
. A
sia
LA
C
Ad
v.A
sia
US
A+
CA
N
Em
ergi
ng
Eu
rop
e
Oth
er A
dv.
E
uro
pe
US
A+
CA
N
LA
C
CIS
ME
NA
Ad
v.A
sia
SS
A
What are the risks?What are the risks?
RISK 1:RISK 1:Euro Area Euro Area
CrisisCrisis
RISK 2:RISK 2:Oil PricesOil Prices
What are the risks?What are the risks?
WEO Downside Scenario for a Disruption in the Global Oil Supply(% deviation from WEO baseline)
What are the risks?What are the risks?
WEO Downside Scenario for a Disruption in the Global Oil Supply(percent or percentage point deviation from baseline)
GDP Loss after Two Years Rise in Inflation after One Year
OutlineOutline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
What needs to be done? (policies)What needs to be done? (policies)
Fiscal policies: gradual consolidation
Monetary and liquidity policies should continue to be accommodative, if possible
Well-coordinated policy package – in most countries
Structural reforms to boost long-term productivity and employment
Support for the unemployed (social policies)
More international coordination of macro-financial policies
Strengthening the global firewall
Macro-prudential policies need to be strengthened
What needs to be done? (policies)What needs to be done? (policies)
Implementation of a clear medium-term fiscal adjustment plan is a key requirement for sustainable growth, with support of fiscal institutions
Fiscal policy
Growth enhancing measures are very important for the fiscal accounts!
Fiscal adjustment should proceed at a steady pace (if there is fiscal space); not too fast not too slow
Challenges:Secure adjustment/reform without immediate market/political pressureDifficult dilemma if there is not fiscal space – no access to borrowing with high deficits…
FISCAL
ADJUSTMENT
Insufficient adjustment could undermine fiscal credibility and lead to fiscal crises, which would be bad for growth
Too much fiscal adjustment could
weaken aggregate
demand, which would be bad for
growth
Fiscal consolidation: Goldilocks Principle: “Not too hot, not too cold, just right” – depends on the specific
circumstances
What needs to be done? (policies)What needs to be done? (policies)
Challenges: When and how to tighten monetary policy? – some program are time-limited
If inflation re-emerges while financial system/recovery is still fragile -- a difficult trade-off…
Restructuring central bank balance sheets after unconventional policies How to respond to the oil shock?What if fiscal consolidation sputters? How to communicate to anchor expectations?The challenge of unbalanced external position and foreign currency dominance in emerging markets – constrains scope for looser monetary policy.
Monetary policy Monetary and liquidity policies should continue to be accommodative -- in most countries, especially as weak demand continues to kip a lid on inflation;
What needs to be done? (policies)What needs to be done? (policies)
Challenges: How to reduce reliance on unstable funding sources?How to limit de-leveraging?How to deal with NPLs and legacy assets?How to regulate cross-border transactions?
Macroprudential policy Adequate financial regulation, supervision, capitalization, liquidity, and crisis-management frameworks.
What needs to be done? (regions/countries)What needs to be done? (regions/countries)
Building a stronger currency union•Improved fiscal rules and institutions
Strengthening banking systems
Euro Area
What needs to be done? (countries/regions)What needs to be done? (countries/regions)
Rebuilding macroeconomic policy room
Strengthening prudential policies and frameworks
Promoting more inclusive growth
Most Emerging Market and Developing Economies
What needs to be done? (countries)What needs to be done? (countries)
Fostering domestic consumption, including through more exchange rate flexibility
Economies with Large External Surpluses
Economies with Large External Deficits
Developing a domestic policy mix to gradually rebalance toward a sustainable export-oriented growth, based on FDI and prudent macroeconomic policies
OutlineOutline
Where are we?
Where are we going?
What are the risks?
Serbia’s economy?
What needs to be done?
The “old-model” problem…
Still-large External Deficit
-25
-20
-15
-10
-5
0
-25
-20
-15
-10
-5
0
2004 2005 2006 2007 2008 2009 2010 2011
Current Account Deficit(percent of GDP)
Serbia SEE /1 CEE 2/
1/ Albania, Bosnia and Hercegovina, Croatia and Macedonia FYR.2/ New EU-10 excluding the Baltics.
And relatively high unit labor costs
With real wage outpacing productivity
And public debt becoming a problem
0
20
40
60
80
100
120
140
160
180Figure 2. Public Debt in Selected Economies, 2011(percent of GDP)
Sources: National authorities, IMF, and staff estimates
Fueled by public spending
0
10
20
30
40
50
60
Arm
en
ia
Alb
an
ia
Ma
ce
don
ia
Bu
lga
ria
Sw
itze
rla
nd
Ro
ma
nia
Ru
ssia
Slo
va
k R
ep
ub
lic
Be
laru
s
Mo
ldo
va
Lith
ua
nia
La
tvia
Cro
atia
Un
ite
d S
tate
s
Lu
xe
mbo
urg
Esto
nia
Sp
ain
Ire
lan
d
No
rwa
y
Po
lan
d
Cze
ch
Re
pu
blic
Ge
rma
ny
Un
ite
d K
ing
do
m
Se
rbia
Ice
lan
d
Slo
ve
nia
Hu
ng
ary
Po
rtu
ga
l
Sw
ed
en
Bo
sn
ia a
nd
He
rze
go
vin
a
Gre
ece
Ita
ly
Ne
the
rla
nds
Au
str
ia
Be
lgiu
m
Fin
lan
d
De
nm
ark
Fra
nce
Sources: National authorities, IMF, and staff estimates
Figure 8. General Government Expenditure in Selected Economies, 2011 (percent of GDP)
sample average
With pension spending especially high
0
2
4
6
8
10
12
14
16
18
20P
akis
tan
In
do
ne
sia
In
dia
T
ha
ila
nd
M
exic
o
Ko
rea
P
hilip
pin
es
So
uth
Afr
ica
S
au
di A
rab
ia
Ma
laysia
Ic
ela
nd
C
hin
a
Eg
yp
t Jo
rda
n
Ire
lan
d
Au
str
alia
C
an
ad
a
Ch
ile
N
ew
Ze
ala
nd
L
atv
ia
Tu
rke
y
Un
ite
d K
ing
do
m
Slo
va
kia
U
nite
d S
tate
s
Ne
the
rla
nd
s
Bu
lga
ria
N
orw
ay
Arg
en
tin
a
Lu
xe
mb
ou
rg
Ro
ma
nia
C
ze
ch
Re
pu
blic
Lith
ua
nia
D
en
ma
rk
Ru
ssia
S
witze
rla
nd
B
razil
Sp
ain
E
sto
nia
S
we
de
n
Be
lgiu
m
Ja
pa
n
Slo
ve
nia
F
inla
nd
Ge
rma
ny
Hu
ng
ary
P
ola
nd
G
ree
ce
P
ort
ug
al
Fra
nce
A
ustr
ia
Se
rbia
Ita
ly
Ukra
ine
Pension expenditure
Advanced countries (average)
Emerging countries (average)
Sources: National authorities, IMF, and staff estimates
Figure 9. Pension Expenditure, 2010(percent of GDP)
What to do?
✤ 1. Fiscal consolidation through structural reforms of spending (pensions, wage bill)
✤ 2. Product market reforms
✤ 3. Labor market reforms
Attract the right kind of FDI
0
1000
2000
3000
4000
5000
2004 2005 2006 2007 2008 2009 2010 2011*
Manufacturing Wholesale and retail trade, repair
Transport, storage and communications Financial intermediation
Real estate, renting and business activities Other
Gross FDI by branch of activity, million euro
Reform severance benefits
Thank YouThank You