Global, regional developments and their impact on Armenia

Caucasus and Central AsiaRegional Economic Outlook Spring 2011Regional Economic Outlook Spring 2011

Oil & Gas

Kazakhstan

Oil & Gas Exporters

Oil & Gas Importers

Uzbekistan

Georgia

Kyrgyz Republic

Turkmenistan

Azerbaijan

ArmeniaTajikistan

Overview

World Economic Outlook

Caucasus and Central Asia (CCA) Developments and Outlook

Caucasus and Central AsiaRegional Economic Outlook Spring 2011

КавказКавказ ии Центральная АзияЦентральная АзияПерспективы развития региональной экономикиПерспективы развития региональной экономики ВеснаВесна 202011 года

Global growth: A double‐speed worldg p

WEO Real GDP Growth Projections(2005‐12, percent change from a year earlier)(2005 12, percent change from a year earlier)

8

10WorldAdvanced EconomiesEmerging and developing economies

6

2

4

‐2

0

‐4

2005 2006 2007 2008 2009 2010 2011 2012



Source: IMF, World Economic Outlook.

3

Multiple‐speed Recovery: Marked Differences in Growth RatesGrowth RatesAverage Projected Real GDP Growth during 2011‐2012(percent)

less than 00 to 33 to 6more than 6

Sources: IMF World Economic Outlook; and IMF staff calculations


КавказКавказ ии Центральная АзияЦентральная АзияПерспективы развития региональной экономикиПерспективы развития региональной экономики ВеснаВесна 202011 года 4

Sources: IMF, World Economic Outlook; and IMF staff calculations.

Armenia’s region not in the fast laneArmenia s region not in the fast lane

120Real GDP in 2010 in percent of 1997–2006 trend

1

110

115

120p

100

105

90

95

80

85

World AE EM Asia LATAM SSA MENA Russia CEE CIS

Source: IMF staff calculations.Pre‐crisis trend obtained by extrapolating 1996–2006 real GDP growth. AE: Advanced economies, EM: Emerging economies, CEE: Central and eastern

Europe, CIS: Commonwealth of Independent States, Asia: Developing Asia, LATAM: Latin America and the Caribbean, MENA: Middle East and North 1



Africa, SSA: Sub‐Saharan Africa.

5

Downside risks, while diminished, dominate

Prospects for World GDP Growth(percent change)

8

90% Confidence interval

Upside risks:

• Buoyant EM activity

• Strong corporate balance sheets

4

650% Confidence interval

Baseline forecast. Dotted lines show width of fan chart in April 2010

• Strong corporate balance sheets

2

4

0

Downside risks:

• Sovereign/financial risks• Oil supply concerns

‐22008 09 10 11 12



Commodity pricesy p

150

140

150Price indices, July 2010=100

SoybeanWheatRiceFood Index

120

130

100

110

90

80

Jul‐10 Aug‐10 Sep‐10 Oct‐10 Nov‐10 Dec‐10 Jan‐11 Feb‐11 Mar‐11 Apr‐11 May‐11



Commodity prices have been boosted by structural cyclical and special factorsstructural, cyclical, and special factors.

260500

Real Commodity Prices(index; 1995=100)

Contribution to Global Annual Growth of Oil Demand(percent)

220

260

400

500

Oil prices (left scale)16

8U.S.Other Industrial CountriesChinaEmerging and Developing Economies

(percent)

180

220

300

400 p ( )

4

6Emerging and Developing EconomiesWorld GDP

140200

2

100100‐2

0

600

Food (right scale)

20001980 90 10 16

‐4

2008Q4 09Q2 09Q4 10Q2 10Q4

Total demand



20001980 90 10 161Simple average of spot prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil.

From Fuel/Food to Core: Evidence from the Last Spike

Advanced Economies Emerging Economies

6

on, 35

y = ‐0.1674x + 3.5896R² = 0.1579

4

el price infla

tio

08 average y = 0.4241x + 7.4695

R² = 0.2053

15

25

rice infla

tion

, average

0

2

Non

‐fue 200

‐5

5

Non

‐fue

l pr

2008

a

y = 0 1767x + 2 6701

8

,

0

‐2 0 2 4 6 8Fuel price inflation, 2007 average

‐5 0 5 10 15Fuel price inflation, 2007 average

y = 0 6204x + 4 9881

35

on,

y 0.1767x + 2.6701R² = 0.0312

2

4

6

price infla

tion

,average

y = 0.6204x + 4.9881R² = 0.3596

5

15

25

d price infla

tio

08 average

0

2

0 2 4 6Non

‐foo

d p

2008

Food price inflation, 2007 average

‐5

5

‐20 ‐10 0 10 20 30

Non

‐foo

d200

Food price inflation, 2007 average



Sources: IMF, World Economic Outlook; and IMF staff estimates.

Conclusions

• Heal fiscal and financialAd d Heal fiscal and financial• Increase growth above potential• Increase potential growth

Advanced economies

• Watch for overheatingEmerging and g• Tighten monetary policy• Be aware of capital inflows

g gdeveloping economies

• Needed to increase growth in advanced Rebalancing still geconomies, especially U.S.

• And allow for fiscal consolidation in AEs

Rebalancing still essential



Caucasus and Central Asia—Outline

CCA developments and outlookCCA developments and outlook

Immediate challenges:

• Inflationary pressures

• Fiscal press res• Fiscal pressures• Impaired banking sectors

Medium‐term challenge: sustaining strong, inclusive, and diversified growthdiversified growth



Strong recovery underwayg y y

Real GDP Growth (annual percentage growth)

Post‐crisis recovery took hold in 2010 15.0

Led by strength of natural resourceCCA oil and gas exporters

China

5.0

10.0

Led by strength of natural resource sectors in oil and gas exporters

CCA oil and i t

g p

world

5 0

0.0

Recovery set to broaden to all CCA countries in 2011 Russia

gas importers

‐10.0

‐5.0

Armenia‐15.0

2000‐08 2009 2010 2011

Sources: National authorities; IMF staff calculations.



Inflation has surged: Risks of becoming entrenched?

25

Consumer Price Index and non food inflation (End‐of‐period; annual percentage change)

Headline inflation has picked up CCA headline¹ 20

25

Food and fuel are the driving factors Armeniaheadline

CCA nonfood

Armenia nonfood

10

15

5

10

But demand pressures also play a role

0

But demand pressures also play a role

Sources: IMF, World Economic Outlook; and national authorities.

‐5

Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11



authorities.¹ Jan and Feb 2011 CCA headline CPI does not include TKM.

In Armenia, private sector demand supported by external inflowsexternal inflows

5001600Remittances (lhs)

USD mln, 12 m cumulatve

300

400

1200

1400

100

200

800

1000Bank flows (rhs)

0

100

600

800

200

‐100

200

400

‐300

‐200

0

200

Dec‐07 Jun‐08 Dec‐08 Jun‐09 Dec‐09 Jun‐10 Dec‐10



As shown by good performance of specific sectors

20

25Activitygrowth ,

10

15

g2010

on

0

5Mining

nufacturing

l trade

nd re

staurants

commun

ication

rvices

Educatio

Health

mun

al

15

‐10

‐5

Ma

Retai

Hotels an

Transport a

nd c

Hou

seho

ld ser

Comm

Agriculture

‐20

‐15

Column1

“External” Demand was driven factor on mining and

f i

“Domestic private” demand was driving

“Government” demand was

Bad weather conditions and structural



manufacturing growths

factor modest problems in the sector

Policy response: Central banks are tightening y p g g

Adjustment in Policy Rates, 2010‐11(P li t t)

CCA central banks have raised interest rates

14

16 Apr‐10

Mar‐11

(Policy rate; percent)

10

12Some countries have used reserves requirements or other sterilization measures

CCA governments have taken administrative actions to limit price 4

6

8sterilization measures

administrative actions to limit price increases or cut taxes

0

2

4

0

AZE KAZ TKM UZB ARM GEO KGZ TJK

Sources: National authorities.



Spending pressures threatening fiscal consolidation plans

Fiscal Deficits in Oil and Gas Importers (Fiscal balance; percent of GDP)

‐3

0

3 2007 2008 2009 2010 2011Higher prices leading to increased pressures for higher wages, pensions, and subsidies

‐12

‐9

‐6

ARM GEO KGZ TJK

Oil importers, with limited fiscal space, need to reduce deficits

ARM GEO KGZ TJK

2007 2008 2009 2010 2011

Non‐oil‐gas Fiscal Deficits in Oil and Gas Exporters (Non‐oil‐gas fiscal balance; percent of non‐oil‐gas GDP)

Oil and gas exporters, with

‐30

‐10

102007 2008 2009 2010 2011ample fiscal space, plan more

gradual consolidation…

‐50

AZE KAZ TKM UZB¹

Sources: National Authorities; and IMF staff calculations.

…and non‐oil deficits remain far above pre‐crisis levels



;¹ Fiscal balance over GDP is used.

Policies to reduce inflation

Watch closely for signs of second‐round effects: core inflation, wages, and credit growth

Continue to respond proactively to higher headline inflation; further tightening likely to be neededfurther tightening likely to be needed

Ensure that supporting policies in place, including toEnsure that supporting policies in place, including to protect the poor



Fiscal policy recommendations

Target spending measures to alleviate inflation effects on the poor

Avoid across‐the‐board spending pressures that feed into inflation

For CCA oil & gas importers: limited fiscal space calls for prioritizing of spendingFor the exporters: ensure efficient spending of windfalls, strengthen non‐oil revenues



Impaired banking sectors in some countries

High, and Mostly Rising Levels of Nonperforming Loans(Nonperforming loans on 90‐day basis; percent of total loans)

24

28 2008

2009

2010

2011 (latest)

High and rising NPLs in some countriescontinue to impair balance sheets

16

20

2011 (latest)

Resolution strategies need to proceed more forcefully in these countries

8

12

Policy challenges:•Increasing competition

countries

4

8•Increasing competition•Strengthening risk management•Better supervision.

0

AZE KAZ TKM UZB ARM GEO KGZ TJK¹

Source: National authorities.¹30‐day basis.



Medium‐term challenge:Sustaining strong inclusive diversified growthSustaining strong, inclusive, diversified growth

Recovery led by commodities and public spending

Pre‐crisis growth drivers yet to recover:• Remittances

And some proved unreliable

Remittances• Other foreign exchange inflows

…And some proved unreliable

CCA economies remain undiversified



Reduce the cost of doing business

200 Paying taxes, Ease of Doing Business

04080

120160

… …

Countries have made progress…

Hon

g Ko

ng SAR, …

Singapore

Estonia

Kazakhstan

Croatia

Lithuania

Afghanistan

Latvia

Geo

rgia

Mon

golia

Turkey

Sloven

iaBu

lgaria

Azerbaijan

Russian Fede

ratio

nMoldo

vaHun

gary

China

Poland

Slovak Rep

ublic

Vietnam

Bosnia and

…Czech Re

public

Serbia

Pakistan

Albania

Kyrgyz Rep

ublic

Romania

Uzbekistan

Arm

enia

Tajikistan

Ukraine

Belarusbut still hard to do business

Key challenges: lack of competition and R

10000

Cost of Export and Import (US$ per container)

Key challenges: lack of competition and excessive role of the state

02000400060008000

…

Intra‐regional links costly, underdeveloped

Singapore

China

Vietnam

Hon

g Ko

ng SAR, …

Pakistan

Latvia

Albania

Estonia

Sloven

iaPo

land

Lithuania

Turkey

Czech Re

p.Croatia

Hun

gary

Bosnia

Romania

Geo

rgia

Serbia

Slovak Rep

.Ukraine

Bulgaria

Belarus

Russia

Arm

enia

Moldo

vaMon

golia

Kazakhstan

Kyrgyz Rep

.Azerbaijan

Afghanistan

Uzbekistan

Tajikistan



Sources: Ease of Doing Business 2011.

Strengthen the quality of institutions and increase transparencytransparency

Governance Indicators 1/

80

CCA Highest

CCA Lowest

CCAavg

EM

/(percentile rank 0‐100)

CCA institutional quality l h

rnan

ce

50

60

70 Armenia

lags other regions

etter G

over

20

30

40

Be

0

10

20

Voice and Political Government Regulatory Rule of Law Control ofVoice and Accountability

Political Stability No Violance

Government Effectiveness

Regulatory Quality

Rule of Law Control of Corruption

Sources: The 2009 Worldwide Governance Indicators; and IMF staff calculations.1/ EM is the average rank over 19 emerging markets.



Invest in human development and protect the poor

Human Development and Corruption

CEE average70

80

t

Poverty and inequality are high in some CCA countries

GEO

KAZ

ARM

AZE

TKM50

60

an Develop

men

g

Unemployment and

TJKKGZUZB

30

40

r level o

f Hum

aUnemployment and underemployment are concerns

LIC Average

10

20

Highe

Investment in human development is key

0

0 20 40 60 80

Sources: 2010 UN Human Development Indicator and TI C ti P ti

Less Corruption



Corruption Perception.

Please visit the IMF’s websites

IMF Office Yerevan:IMF Office Yerevan:www.imf.org/yerevanwww.imf.org/yerevan

Full report: Full report: http://www.imf.org/external/pubind.htm

What do you think?What do you think?Make your point on the related blogs:Make your point on the related blogs:

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Global, regional developments and their impact on Armenia