The Black Sea Trade and Development

BankThe Forgotten

Neighborhood: An Overview of Economic And Regional Trends Around the Black

SeaFifth International Black Sea Symposium The Black Sea Region as an Influential

Crossroad Between East and West: A Path Towards ExtroversionAthens, 4 July 2012

Outline of Presentation

Overview of Economic Situation in the Black Sea Region

Outlook for Region & Key Challenges

Black Sea Regionalism and the EU

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2000-08: High growth; 2009: Negative; 2010 &11:

Recovery; 2012: ?

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Regional Trends: 2000-08 Before Economic

CrisisHigh growth despite diversity of

economies- all countries experience positive growth 2002-08

Between 2000-08 annual real GDP growth averages 5.9%

Living standards/ per capita income rise, poverty rates decline sharply

Private capital flows increase- esp. FDI over 4% GDP 2006-08

Intra-Regional trade, investment, financing, also increase 4

Financial Crisis 2008-09

9/08- Global markets freeze, financing disappears

Govts, banks, firms dependent on external financing face liquidity ‘crunch’

Regional financial systems face loss of confidence- Governments support successfully at high cost

Financial systems relatively small - therefore damage less than elsewhere in E. Europe.

For most part in Black Sea Region financial crisis limited- Ukraine an exception

Black Sea Region mainly suffered a short but sharp Economic crisis

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Economic Crisis in Black Sea

Credit to businesses & consumers disappeared reducing liquidity & demand, slowing investment

International trade flows dropped, exports down, contraction in key W. European markets

Problems exacerbated by declines in (i) commodity prices, (ii) remittances, (iii) sundry external receipts

Reversal of fortune- poverty/ unemployment/ fiscal deficits up; current account deficits/ trade flows/ inflation down

Painful adjustment process only course for most

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Why was Black Sea (& C/E Europe) Highly

Vulnerable?Pro-cyclical fiscal policy- deficits maintained

during rapid economic growth added an unnecessary stimulus which (i) overheated the economy and (ii) made it difficult to counteract the downturn with increased public spending and/or tax cuts,

Large current account deficits Private sector foreign financed domestic

demandLack of a domestic capital base and/or of

domestic champions able to compete internationally General dependence on/ vulnerability to

continued flow of external financing7

‘Silver linings’ to the crisis

Aside from Greece, not a debt crisis. In most countries debt levels low &debt servicing comfortable

Nasty recession but speedy recoveryGovernments responded promptly and

substantively to support banking systemsVienna Initiative to refinance/ recap banksIMF programs in many countries: Armenia,

Greece, Georgia, Moldova, Romania, Serbia, Ukraine- some ongoing, some stalled, some replaced by new

FDI slow to recover, but still at 2.0-2.5% of GDP 8

BSEC Region in 2009- a very difficult year

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 GDP

Growth InflationCur Acc Bal

/ GDPBudget/

GDPPublic

Debt/GDPAlbania 3.3% 2.3% -15.2% -7.0% 59.8%Armenia -14.2% 3.4% -15.8% -7.5% 40.6%Azerbaijan 9.3% 1.5% 23.0% 6.6% 12.1%Bulgaria -5.5% 2.8% -8.8% -0.9% 15.6%Georgia -3.8% 1.7% -11.6% -7.7% 37.0%Greece -3.3% 1.2% -11.2% -15.6% 129.5%Moldova -6.0% 0.0% -9.8% -6.4% 32.4%Romania -7.1% 5.6% -4.2% -7.3% 23.9%Russia -7.8% 11.7% 4.0% -6.3% 8.3%Serbia -3.5% 8.4% -7.1% -4.8% 38.2%Turkey -4.8% 6.3% -2.2% -5.5% 46.4%Ukraine -14.8% 15.9% -1.5% -3.8% 34.8%

BSEC Region in 2010- Recovery

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 GDP

Growth InflationCur Acc Bal

/ GDPBudget/

GDPPublic

Debt/GDPAlbania 3.9% 3.6% -11.7% -3.1% 58.2%Armenia 2.1% 8.2% -14.7% -4.9% 44.0%Azerbaijan 5.0% 5.7% 28.4% 14.0% 11.4%Bulgaria 0.4% 2.4% -1.5% -4.0% 17.4%Georgia 6.3% 7.1% -11.4% -6.6% 42.0%Greece -3.5% 4.7% -10.3% -10.5% 144.8%Moldova 7.1% 7.4% -9.8% -2.5% 30.2%Romania -1.3% 6.1% -4.4% -6.4% 31.7%Russia 4.3% 6.9% 4.8% -3.5% 9.4%Serbia 1.0% 6.5% -7.7% -4.8% 44.9%Turkey 9.2% 8.6% -6.4% -3.6% 43.0%Ukraine 4.1% 9.4% -2.2% -5.9% 39.6%

BSEC Region in 2011-‘New Normal’?

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 GDP

Growth InflationCur Acc Bal

/ GDPBudget/

GDPPublic

Debt/GDPAlbania 1.6% 3.5% -12.2% -3.4% 59.4%Armenia 4.6% 7.7% -10.9% -2.9% 49.0%Azerbaijan 0.1% 7.9% 27.0% 13.3% 12.0%Bulgaria 1.7% 4.2% 0.9% -2.0% 17.5%Georgia 7.0% 8.5% -12.5% -3.2% 43.6%Greece -6.9% 3.3% -9.8% -9.2% 162.5%Moldova 6.4% 7.6% -12.6% -2.4% 29.6%Romania 2.5% 5.8% -4.5% -4.1% 34.5%Russia 4.3% 8.4% 5.3% 1.6% 8.2%Serbia 1.6% 11.0% -9.7% -5.1% 44.1%Turkey 8.5% 6.5% -10.0% -1.3% 42.6%Ukraine 5.2% 8.0% -5.5% -1.4% 38.0%

The Black Sea Region in 2010-11

Most countries recover and post real growthCredit flow restarts, unsteadily & at higher

costConsumption recovers more quickly than

investment (domestic and FDI)Export recovery- roughly to 2006-07 levelsTurkey and Russia emerge as key drivers of

growthEU members relative laggards- Greece an

outlierUnemployment still highInflation comes and goesFiscal deficits declining

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Fiscal Balances- Slow Recovery from Downturn

Deterioration

Sources: National Statistical Agencies, IMF-IFS & EIU

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FDI in the Black Sea Region Since 2000

Sources: National Statistical Agencies, IMF-IFS & EIU

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Outlook for Black Sea Region

Contraction over for all except Greece; positive growth to continue in 2012.

Appear to be on new ‘track’: 3-4% annual real GDP Growth. Less than previous 6% but re-starts convergence to W. Europe levels.

High investment needs in infrastructure over next decade- looming bottleneck in many countries

Investment slow to return so far, & need to improve business environment, but relocation of EU production capacity to Region likely to continue

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Long Term Regional Prospects Mostly Positive

Proximity to wealthy markets of W. EuropeQuality of business environment favorable

& improvingHigh quality of human capital at relatively

low costExperience, flexibility & resilience in

dealing with crises & taking difficult measures

Financial sectors small. thus, less damage to economy, and have room for ‘organic’ growth

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Key RisksExogenous shocks (commodity, finance,

geopolitics, etc.)Governance & rule of law issuesInfrastructure quality poor; looms as

bottleneck to continued growthUncertain EU-Black Sea relations, esp. with

RussiaRisk of contagion from Eurozone crisis

High external financing needs make Region vulnerable to market upheavals & liquidity ‘crunches’

Dependence on W. Europe for absorption of exportsPotential for the Euro crisis to spread to the

Region’s banking sectors- Is foreign ownership a source of stability or instability? 1

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Capital Flows to Emerging Europe- Some Recovery,

Much Uncertainty

Source: International Institute of Finance

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Key Regional Challenges for Future

Sustaining Economic Growth- (i) maintaining stability, (ii) increasing productivity, (iii) reduce poverty & achieve convergence

Evolution of Political Economy Relations with EU- more complicated than ever

Managing Uncertainty & Reducing VulnerabilityAlso:Long Term Demographic trends: (i) need to adapt

structurally, (ii) workforce implications, (iii) fiscal pressures

Environmental issues: (i) impact on quality of life, (ii) the implications of global accords on local economic activity 1

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Managing Uncertainty & Reducing Vulnerability

Easier diagnosed than curedArray of economic risks beyond access to

finance: geopolitics, food security, commodity prices & availability (inc. energy), environmental questions, etc.

Even though Russia & Turkey are in G20, Region is a ‘taker’ in policy terms, not a ‘maker’

Nascent but dangerous trend to protectionism & isolationism- food export bans, gas flow cuts capital restrictions, exchange rate manipulation 2

0

Can Regional Cooperation Mitigate Risks & Offer

Outlet?No panacea, but room for growth in

investment, trade & financing: Many ‘Win – Win’ possibilities exist

Potential gains are higher for small/ medium countries that need openness to grow

Can expand market reach of banks & firms Official cooperation usually leads (e.g. EU

accession activities) but real take-off from private linkages

Benefits for competitiveness & sustainability- ‘local’ and more firmly established, less contagion sensitive

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Can Regional Cooperation Mitigate Risks?

Prospects not favorableLack of political commitment- there are

forums for dialogue and information sharing, but limited prospects for policy harmonization, resource pooling, or common institutions

Economic difficulties an obstacleIntensifying bilateral rivalriesEU influence- (i) Diverts country focus

to west, (ii) Rules & restrictions hurt Black Sea cooperation prospects 2

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Regional Trade: Setback in 2009, Partial Recovery

in 2010

Sources: National Statistical Agencies23

Regional Relations with EU- Why Important?

Most important external economic actor, directly & indirectly, high externality impact

Main market for trade, investment, financeKey exporter of rules, regulations,

standardsSteady expansion of engagement with

Black Sea up to 2009, politically and economically.

Negative impact on Regional Cooperation despite BSS & EaP. Mainly engages countries Bilaterally

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EU & Black Sea in the Crisis

In Crisis, little direct aid to- or cooperation with- Black Sea. No Eurobonds, Financial Stability Fund, Institutional Mechanisms, etc……

However, HUGE indirect involvement: (i) IMF funding, (ii) ECB operations through Eurozone based banks, (iii) Operations of EIB, etc. WHY?Quicker delivery mechanisms of proxiesFear of setting precedents by direct

engagement?Lack of internal consensus on what to

do? 25

EU & Black Sea Post-Crisis

The Eurozone crisis- esp. the Greek question- consumes most EU attention

EU unwilling/ unable to consider new initiatives

Internal EU discord, esp. over Russia & Turkey

Existing initiatives confused and undermine each other: BS Synergy vs. E. Partnership

IFIs (EIB & EBRD) very active, but EC resources uncertain, cannot just ‘throw money’

Eurozone expansion (Bul/Rom) & EU expansion (Tur/ Srb/ Alb/ ‘ENPs’?) Uncertain

Impact of ‘Arab Spring’? 26

EU & Black Sea Future Uncertain

Critical importance of EU-Russia relations Much uncertainty as to future. No clear EU

policy, Black Sea states wish closer engagement

Lack of EU Perspective & EU 27 ‘growing pains’ hurt image & attractiveness of EU

Compounded by view that crisis imported from West + perception of EU ‘disappearance’

Popularity of € waxed in 08-09/ wanes with Euro-zone crisis. In Black Sea € predominant in west & Turkey (EU ‘Ins’), US$ in east (EU ‘outs’). 2

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What the EU Can Do

EU membership perspective is the most effective cooperation enhancing policy

In its absence, EU’s IPA programs a useful model for considering cooperation initiatives in Black Sea (and elsewhere).

EU can do much better job supporting locally developed cooperation initiatives such as BSEC

EU can also do better job of not undermining itself- BS Synergy vs. EaP 2

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