Transcript World Economic Outlook

The Global and Serbia’s Economy
Lecture at the Economic Faculty
Belgrade, May 22, 2012
Bogdan Lissovolik
IMF Resident Representative for Serbia
Outline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
Outline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
WHAT IS IMF ?
GLOBAL MEMBERSHIP
187 COUNTRIES REPRESENTED
NON-MEMBERS INCLUDE: CUBA, NORTH KOREA, ANDORRA, MONACO, NAURU, LIECHTENSTEIN
MANDATE: GLOBAL ECONOMIC & FINANCIAL STABILITY
SHORT-TERM BALANCE OF PAYMENT SUPPORT
FACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOME
PILLAR OF MULTILATERALISM
PROMOTES ECONOMIC COOPERATION
COMPLEMENTS THE UN, WORLD BANK, WTO & ILO
Where are we?
Output Growth, 2011Q4
Where are we?
Public Debt
(% of GDP)
Where are we?
10-Year Government Bond Yields
Where are we?
Capital Flows to Emerging Markets and Developing Economies
Greece
Crisis
($US billion; weekly)
Ireland
Crisis
ECB
LTRO
Where are we?
Unemployment rates
Outline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
Where are we going?
Output Growth, 2012-13
Where are we going?
The Brakes: Fiscal Consolidation
(change in the structural balance; percentage points of potential GDP)
Where are we going?
The Brakes: Bank Deleveraging
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?
Real GDP Growth
Advanced Economies
Emerging and Developing Economies
Sept. 2011 WEO
Sept. 2011 WEO
Outline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
What are the risks?
RISK 1:
Euro Area Crisis
RISK 2:
Oil Prices
What are the risks?
GROWTH
vicious
cycles
FISCAL
BANKS
What are the risks?
GROWTH
vicious
cycles
FISCAL
BANKS
Exports of Goods to the Euro Area
Euro Area Bank Claims
(2010)
(% of GDP; Sep. 2011)
SSA
Adv.
Asia
MENA
CIS
LAC
USA+
CAN
Emerging
Europe
Other Adv.
Europe
USA+CAN
Adv.
Asia
LAC
Dev.
Asia
SSA
MENA
CIS
Other Adv.
Europe
Emerging
Europe
Euro
Area
What are the risks?
What are the risks?
RISK 1:
Euro Area Crisis
RISK 2:
Oil Prices
What are the risks?
WEO Downside Scenario for a Disruption in the Global Oil Supply
(% deviation from WEO baseline)
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
Outline
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)
Well-coordinated policy package – in most countries
Fiscal policies: gradual consolidation
Monetary and liquidity policies should continue to be accommodative, if possible
Macro-prudential policies need to be strengthened
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
What needs to be done? (policies)
Fiscal policy
Fiscal adjustment should proceed at a steady pace (if there is fiscal
space); not too fast not too slow
Implementation of a clear medium-term fiscal adjustment plan is a key
requirement for sustainable growth, with support of fiscal institutions
Growth enhancing measures are very important for the fiscal accounts!
Challenges:
Secure adjustment/reform without immediate market/political pressure
Difficult dilemma if there is not fiscal space – no access to borrowing with high
deficits…
Fiscal consolidation: Goldilocks Principle: “Not too hot, not
too cold, just right” – depends on the specific circumstances
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
What needs to be done? (policies)
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;
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.
What needs to be done? (policies)
Macroprudential policy
Adequate financial regulation, supervision, capitalization, liquidity,
and crisis-management frameworks.
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?
What needs to be done? (regions/countries)
Euro Area
Building a stronger currency union
•Improved fiscal rules and institutions
Strengthening banking systems
What needs to be done? (countries/regions)
Most Emerging Market and Developing Economies
Rebuilding macroeconomic policy room
Strengthening prudential policies and frameworks
Promoting more inclusive growth
What needs to be done? (countries)
Economies with Large External Surpluses
Fostering domestic consumption, including through more exchange rate flexibility
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
Outline
Where are we?
Where are we going?
What are the risks?
What needs to be done?
Serbia’s economy?
The “old-model” problem…
Still-large External Deficit
Current Account Deficit
(percent of GDP)
0
0
-5
-5
-10
-10
-15
-15
-20
-20
Serbia
SEE /1
CEE 2/
-25
-25
2004
2005
2006
2007
2008
2009
2010
1/ Albania, Bosnia and Hercegovina, Croatia and Macedonia FYR.
2/ New EU-10 excluding the Baltics.
2011
And relatively high unit labor costs
With real wage outpacing productivity
And public debt becoming a problem
180
160
Figure 2. Public Debt in Selected Economies, 2011
(percent of GDP)
140
120
100
80
60
40
20
0
Sources: National authorities, IMF, and staff estimates
0
Sources: National authorities, IMF, and staff estimates
Armenia
Albania
Macedonia
Bulgaria
Switzerland
Romania
Russia
Slovak Republic
Belarus
Moldova
Lithuania
Latvia
Croatia
United States
Luxembourg
Estonia
Spain
Ireland
Norway
Poland
Czech Republic
Germany
United Kingdom
Serbia
Iceland
Slovenia
Hungary
Portugal
Sweden
Bosnia and Herzegovina
Greece
Italy
Netherlands
Austria
Belgium
Finland
Denmark
France
Fueled by public spending
60
Figure 8. General Government Expenditure in Selected Economies, 2011
(percent of GDP)
50
sample average
40
30
20
10
18
14
12
10
0
Pakistan
Indonesia
India
Thailand
Mexico
Korea
Philippines
South Africa
Saudi Arabia
Malaysia
Iceland
China
Egypt
Jordan
Ireland
Australia
Canada
Chile
New Zealand
Latvia
Turkey
United Kingdom
Slovakia
United States
Netherlands
Bulgaria
Norway
Argentina
Luxembourg
Romania
Czech Republic
Lithuania
Denmark
Russia
Switzerland
Brazil
Spain
Estonia
Sweden
Belgium
Japan
Slovenia
Finland
Germany
Hungary
Poland
Greece
Portugal
France
Austria
Serbia
Italy
Ukraine
With pension spending especially high
20
Figure 9. Pension Expenditure, 2010
(percent of GDP)
16
Pension expenditure
Advanced countries (average)
Emerging countries (average)
8
6
4
2
Sources: National authorities, IMF, and staff estimates
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
Gross FDI by branch of activity, million euro
5000
4000
3000
2000
1000
0
2004
2005
2006
2007
2008
2009
2010
Manufacturing
Wholesale and retail trade, repair
Transport, storage and communications
Financial intermediation
Real estate, renting and business activities
Other
2011*
Reform severance benefits
Thank You