Transcript Global Financial and Economic crisis and its possible implications in

Financial and Economic Crisis:
effects on BH economy
Marco Mantovanelli
Country Manager
The World Bank
Sarajevo, 24 February 2009.
Financial Crisis in the EU and the
Western Balkans
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Financial sector in EU and the region on the way to stability, BUT
surprises are still possible
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EU economies going into recession:
 Eurozone growth 1.1% in 2008 and -0.7% in 2009 (UN Global
Outlook 2009).
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Western Balkan countries can expect a significant growth slowdown
Financial system in BH is
relatively stable
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No bank operating in BH has invested in toxic mortgage backed
securities or other risky investment instruments
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Banks have held a conservative lending policy and the rate of nonperforming loans in BH is very low
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Deposit withdrawals in October were significant (around 600 million
KM), but far from enough to undermine system stability. Deposits have
since stabilized
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Central Bank suffered no losses on its investments
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Central Bank foreign exchange reserves are sufficient to absorb sudden
stops of foreign private capital inflows for more than a year.
…but other channels bring crisis
into BH
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Capital inflows and FDI are decreasing
 Higher cost of borrowing and credit crisis on markets outside BH,
have not only slowed down credit expansion, but harder loan access
conditions for corporate and mortgage lending can also be expected.
 In absence of large company privatization, the FDI inflow will be
much reduced in 2009.
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Recession in the EU and the US is expected to reduce inflow of
remittances sent back by the Diaspora
 Even if remittances do not decrease, the growth trend will not be
continued
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Exports will decrease due to market demand drop (EU and the
region), and fall in commodity prices
 Primary commodities account to 42% of BH exports (base metals:
27%); commodity prices and demand have falled drastically.
 EU and the region account of around 90% of BH exports, all hit by
crisis.
Export changes for main product
categories
(same month of the previous year)
BiH Export Growth (2008, year-on-year)
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
8-Sep
8-Oct
8-Nov
Product category
Key impact of the economic crisis in BH:
2008, 2009…?
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Stock markets plunged by around 65% in 2008. Recovery will be slow
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Private investment rate is falling
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Industrial production dropped substantially in January
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GDP growth will fall from 6% in 2008 to ….. hard to tell, but it could be to
zero growth in 2009!
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Inflation will fall considerably as well as current account deficit but the
deficit financing will be difficult!
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Stagnant public revenues (a problem particularly for the Federation)
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Companies hit by crises will be making redundancies (see metal industries)
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Poverty rate in certain communities could increase
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Rate of non-performing loans will increase
Adequate measures for mitigating the
impact of the crisis 1
WELL COORDINATED MEASURES ACROSS BH ARE NECESSARY FOR:
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Maintain the stability of the banking sector
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Minimize the impact of the crisis on the economy
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Strengthen social safety nets and better social assistance
targeting
Adequate measures for mitigating the
impact of the crisis 2
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Maintain the stability of the banking sector:
Continue with measures for increased bank liquidity
Consider the adequacy of the deposit insurance system
Improve banking supervision
Improve the running, control and transparency system of
the development banks
 Leave unchanged the role of the Central Bank as the
Currency board
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Adequate measures for mitigating
the impact of the crisis 3
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Mitigating the impact of the crisis on the economy:
 In case there is a sudden drop of total demand, the well planned,
targeted and temporary fiscal stimulus for increase of the public
investment rate should be considered. COORDINATION AND
ADDITIONAL EXTERNAL FINANCING SOURCE ARE NECESSARY!
 Improve the public expenditure structure, and in particular:
rationalise transfers to private entitites, decrease the
participation rate in public expenditures.
 Undertake systemic efforts to ensure additional financing for key
infrastructure projects and credit lines for the private sector, as
well as faster implementation of the approved development loans
 Enhance enterprise competitiveness: improve business
environment (reduce regulatory framework)
 Enhance taxation policy: decrease the burden on economy and
impose taxes on luxury expenditures
► Decreased contributions, higher accise payments, custom’s
tariffs harmonized with the EU, leave VAT unchanged
Adequate measures for mitigating the
impact of the crisis 4
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Strengthening of the social protection measures and better targeting of
social assistance, so as to:
 Protect the most vulnerable categories of the population
 Decrease the budgetary pressures and increase fiscal space for a
more productive public expenditure categories in basic
infrastructure/services
 Stimulate employment
BH has an exceptionally ineffective
social benefit system!!!
How to speed up the growth after the crisis:
Measures to improve economic and social
cohesion, support to accelerated growth and
EU integration
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Build a true single economic space
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Improve fiscal coordination and strengthen fiscal policy
Improve financial sector supervision
Harmonize direct taxation systems
Harmonize Labor registration
Strengthen national economic planning process
Improve inter-entity coordination of infrastructure investments of significance for the whole
BH (transport and energy as key)
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Improve business environment by enhancing regulatory environment and
strengthening the mechanisms for enterprise restructuring and exit
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Complete the privatization process
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Develop an economic strategy for the whole BH and work towards enhancement of
energy efficiency
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Improve efficiency and quality of education and invest in ‘out-of-school’ skill
development
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Continue to strengthen systems of social protection of pension funds in a sustainable
and efficient manner
How can the WB help?
Mitigate impact on the real economy:
► Continue to provide consultancy services upon request (Privatization,
Social Spending etc.)
► Acceleration of already approved projects, particularly in infrastructure
► Line of credit for SMEs and other new projects
► Doing Business memorandum and follow up actions to improve
business environment
► Possible budget support only under the condition that appropriate
macroeconomic framework reforms are undertaken
Support the most vulnerable population categories:
► Policy note on targeted social benefits
► New project for support of implementation of targeted social benefits