Transcript Georgia

Prospects and Challenges for
Economic Growth in the South
Caucasus and other Transition
Economies
C. Felipe Jaramillo
The World Bank
Tbilisi, Georgia, February 1, 2007
1. Growth record since 1990
2. Recent trends in Transition
Economies: 2005-06
3. The South Caucasus Economies
ECA – Real GDP Growth (%)
ECA – Index of Real GDP (1990=100)
South C aucasus
Index of Real GD P (1990=100)
180
AZE
160
140
120
CIS
ARM
100
80
60
40
GEORGIA
A rmen ia
A zerb aijan
Geo rg ia
f
p
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
19
90
20
CIS
Transition, reforms and growth
Average Reform Indicator
1990, 2000, 2006
4.00
3.00
1990
2.00
2000
2006
1.00
0.00
CIS
Other transitioon
countries
Source: EBRD
Substantial progress was achieved by CEB -- markets have responded
favourably to previous reforms.
Reform in CIS countries has been slower and less ambitious – but growth
has picked up in recent years in reforming countries (and oil exporters)
With a positive external environment, most countries have enjoyed strong
growth in 2004-06, leading in some cases to “reform complacency”
2. Recent Economic Trends in
Transition Economies –
EU 8+2
EU 8: Poland, Czech, Hungary, Eslovenia,
Slovakia, Latvia, Estonia, Lithuania
+2: Romania, Bulgaria
www.worldbank.org/eca
Short-term performance in
EU8+2 remains very positive
External environment – remained broadly favorable
(some slowdown, but falling oil prices)
Financial markets in the region recovered firmly from
the May-June 2006 turmoil supported by overall
strong fundamentals
Capital inflows translated into strong appreciation
trends
Bullish stock markets -- record highs
Outlook: remains positive, with some EU8+2
countries vulnerable to sudden corrections
Real GDP Growth (%
yoy)
Growth gained further steam
16
14
12
1Q 06
2Q 06
3Q 06
2005
10
8
6
4
2
0
CZ
EE
HU
LV
LT
PL
SK
SI
BG
RO
Strong growth momentum maintained in 3Q
Increasingly driven by vibrant domestic demand
Stimulated by strong credit expansion and wage growth (the
Baltics and Romania/Bulgaria)
Growth likely to slow down in 2007 in line with
euro-zone and closing output gaps
LV
LT
BG
3Q 06
2Q 06
1Q 06
4Q 05
3Q 05
3Q 06
2Q 06
1Q 06
Income, net
4Q 05
3Q 05
3Q 06
2Q 06
1Q 06
4Q 05
3Q 05
3Q 06
Trade in services, net
Current account balance
2Q 06
1Q 06
4Q 05
3Q 05
3Q 06
1Q 06
4Q 05
EE
2Q 06
Trade in goods, net
Current transfers, net
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
3Q 05
Current
account deficit
(% of GDP)
External imbalances mount…
RO
Current account balances have worsened in most economies (except HUN
and POL) --- on the back of widening trade deficits exacerbated by real
exchange rate appreciation
The largest external imbalances (the Baltics, Slovakia and Bulgaria/Romania)
are generated in the private sector translating into booming private sector
credit
Increasing inflationary pressures
Contribution of regulated prices measures
10
Contribution of market prices increase
8
Contribution
to CPI
inflation (perc.
points)
6
4
2
2002
2004
2005
2006*
SI
PL
LV
LT
2003
2004
2005
2006*
2002
2004
2005
2006*
SK
2002
2004
2005
2006*
2002
2004
2005
2006*
HU
2002
2004
2005
2006*
2002
2004
2005
2006*
CZ
2002
2004
2005
2006*
2002
2004
2005
2006*
0
EE
BG
Inflationary pressures intensified in most countries
Related to rapid output growth and closing of output gaps, labor
market tightening, rapid credit expansion and pro-cyclical fiscal
policies
In response to increasing pressures, somewhat balanced by
appreciation trends, most EU8+2 followed the ECB tightening
cycle
Fiscal consolidation rather slow
Sizeable increase in fiscal deficit in 2006 projected in
Hungary (to about 10% of GDP) and Slovakia
Structural fiscal balances deteriorated in most countries
(except Poland and Bulgaria)
Fiscal position likely to worsen in 2007 in the Czech
Republic, Estonia, Bulgaria and Romania. Major
adjustment only in Hungary
Concern: Fiscal policy may be exacerbating the
imbalances of the current expansion cycle
Structural reforms largely stalled
Some further progress on privatization, but strategic
sectors remain state-controlled
Little progress on further enhancing labor market
flexibility (labor taxes, mobility)
Limited progress in other areas of business
environment, incl. the functioning of the judiciary in
the newest member states
Public finance reforms stalled (but ambitious plans
in Hungary)
Governance remains a problem in most countries
3. What is happening in the
South Caucasus?
Georgia
Annual GDP Growth Rate 2003-2006
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2003
2004
2005
2006
Strong growth performance in recent years explained by
pickup in reforms, solid fiscal management and growing
positive market sentiment
Strong fiscal mgmt – fast revenue growth
Georgia: tax revenues, 2000-2006
4.0
22%
3.0
20%
18%
2.0
16%
1.0
14%
-
12%
2000
2001
2002
2003
2004
2005
Tax revenues, current bln GEL (left scale)
Tax revenues as % of GDP (right scale)
2006p
Strong pickup in FDI – beyond pipeline
Georgia: FDI inflows, 2000-2006
1,000
Non-oil FDI
Oil FDI
million $
800
600
400
200
0
2000
2001
2002
2003
2004
2005
2006
And more diversified FDI sources
Georgia: C umulative FD I inflow s by source, 2000-2006 (% )
Others
20%
4%
F rance
Italy
5%
Cyprus
5%
Norway
6%
6%
Russia
7%
Kazakhstan
Turkey
9%
Azerbaijan
9%
14%
USA
15%
UK
0%
5%
10%
15%
20%
Has weathered well export restrictions
25
300
20
250
200
15
%
150
10
100
5
50
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004
Export Total
2005
2006
Russia's share in Exports
Million $
Georgia: Export Trends, 2004-2006
Georgia – emerging challenges
Georgia: Inflation and CAB
2003-2006
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
Inflation (annual p.a.)
2003
2004
CAB (% of GDP)
2005
2006
Some signs of overheating (inflation pick up, growing
external imbalances, rapid credit growth)
Challenge of continuing to boost trade and diversify products
and partners
Armenia
Annual GDP Growth rate 2003-2006
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2003
2004
2005
2006
Impressive fifth year of double digit growth – fueled by
continued reforms and strong macro-fiscal management
Fueled by private sector – consumption and investment
(FDI and remittances)
Armenia – emerging challenges
Rapid credit growth from a small base
Appreciation pressures and external
competitiveness challenge
Azerbaijan
Annual GDP Growth rate 2003-2006
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2003
2004
2005
2006
Very high growth since 2003 derived from large
oil exports
Azerbaijan
Azerbaijan: Inflation
2003-2006
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Inflation (annual p.a.)
2003
2004
2005
2006
Risk of “Dutch disease”
Deteriorating fiscal position – fast growth of expenditures
Rapid credit growth
Inflationary pressures and real appreciation
Faltering reform efforts?
Challenges and emerging issues in
South Caucasus economies
Avoiding reform fatigue
S. Caucasus: Average Reform Indicator
2003- 2006
3.00
2003
2004
2.50
2005
2006
2.00
Georgia
Armenia
Azerbaijan
Challenges and emerging issues in
South Caucasus economies
Dealing with appreciation pressures – micro
and regulatory reforms to boost
competitiveness
Need to address trade bottlenecks -continue to expand and diversify export
supply and markets
Challenges of financial development
The End
Prospects and Challenges for
Economic Growth in the South
Caucasus and other Transition
Economies
C. Felipe Jaramillo
The World Bank
Tbilisi, Georgia, February 1, 2007