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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
South CaucasusIndex of Real GDP (1990=100)
20
40
60
80
100
120
140
160
180
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
2006p
2007f
A rmen ia A zerbaijan Georg ia CIS
GEORGIA
ARM
AZE
CIS
Transition, reforms and growth
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”
Average Reform Indicator 1990, 2000, 2006
0.00
1.00
2.00
3.00
4.00
CIS Other transitiooncountries
1990
2000
2006
Source: EBRD
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 trendsBullish stock markets -- record highsOutlook: remains positive, with some EU8+2 countries vulnerable to sudden corrections
Growth gained further steam
0
2
4
6
8
10
12
14
16
CZ EE HU LV LT PL SK SI BG RO
1Q 06 2Q 06
3Q 06 2005
Rea
l GD
P G
row
th (
% y
oy)
Strong growth momentum maintained in 3QIncreasingly 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
External imbalances mount…
-30-25-20-15-10-505
1015202530
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
Trade in goods, net Trade in services, net Income, netCurrent transfers, net Current account balance
EE LV LT BG 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 appreciationThe largest external imbalances (the Baltics, Slovakia and Bulgaria/Romania) are generated in the private sector translating into booming private sector credit
Cu
rren
t ac
cou
nt
def
icit
(%
of
GD
P)
Increasing inflationary pressures
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 policiesIn response to increasing pressures, somewhat balanced by appreciation trends, most EU8+2 followed the ECB tightening cycle
0
2
4
6
8
10
2002
2004
2005
2006*
2002
2004
2005
2006*
2002
2004
2005
2006*
2002
2004
2005
2006*
2002
2004
2005
2006*
2002
2004
2005
2006*
2002
2004
2005
2006*
2002
2004
2005
2006*
2003
2004
2005
2006*
Contribution of regulated prices measures Contribution of market prices increase
CZ HU SK SI PL LV LT EE BG
Contribution to CPI inflation (perc. points)
Fiscal consolidation rather slowSizeable 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-controlledLittle 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
Georgia
Strong growth performance in recent years explained by pickup in reforms, solid fiscal management and growing positive market sentiment
Annual GDP Growth Rate 2003-2006
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2003 2004 2005 2006
Strong fiscal mgmt – fast revenue growth
Georgia: tax revenues, 2000-2006
-
1.0
2.0
3.0
4.0
2000 2001 2002 2003 2004 2005 2006p
12%
14%
16%
18%
20%
22%
Tax revenues, current bln GEL (left scale)
Tax revenues as % of GDP (right scale)
Strong pickup in FDI – beyond pipelineGeorgia: FDI inflows, 2000-2006
0
200
400
600
800
1,000
2000 2001 2002 2003 2004 2005 2006
mill
ion
$
Non-oil FDI Oil FDI
And more diversified FDI sourcesGeorgia: Cumulative FDI inflows by source, 2000-2006 (% )
15%
14%
9%
9%
7%
6%
6%
5%
5%
4%20%
0% 5% 10% 15% 20%
UK
USA
Azerbaijan
Turkey
Kazakhstan
Russia
Norway
Cyprus
Italy
France
Others
Has weathered well export restrictionsGeorgia: Export Trends, 2004-2006
0
5
10
15
20
25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004 2005 2006
%
0
50
100
150
200
250
300
Mill
ion
$
Export Total Russia's share in Exports
Georgia – emerging challenges
Some signs of overheating (inflation pick up, growing external imbalances, rapid credit growth)
Challenge of continuing to boost trade and diversify products and partners
Georgia: Inflation and CAB 2003-2006
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Inflation (annual p.a.) CAB (% of GDP)
2003 2004 2005 2006
Armenia
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)
Annual GDP Growth rate 2003-2006
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2003 2004 2005 2006
Armenia – emerging challenges
Rapid credit growth from a small base
Appreciation pressures and external competitiveness challenge
Azerbaijan
Very high growth since 2003 derived from large oil exports
Annual GDP Growth rate 2003-2006
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2003 2004 2005 2006
Azerbaijan
Risk of “Dutch disease” Deteriorating fiscal position – fast growth of expenditures Rapid credit growthInflationary pressures and real appreciation
Faltering reform efforts?
Azerbaijan: Inflation 2003-2006
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Inflation (annual p.a.)
2003 2004 2005 2006
Challenges and emerging issues in South Caucasus economies
Avoiding reform fatigue
S. Caucasus: Average Reform Indicator 2003- 2006
2.00
2.50
3.00
Georgia Armenia Azerbaijan
2003
2004
2005
2006
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
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