The Black Sea Trade and Development Bank

1. The Black Sea Trade and Development Bank IMPACT OF THE CRISIS ON REGIONAL ECONOMIES AND ECONOMICCOOPERATION Thessaloniki 2009

2. Macroeconomic Outlook • After Eight Years of real GDP Growth averaging 5.9%, the Black Sea Region economy has suffered a serious economic downturn as a result of the crisis. • 2008 real GDP growth was + 4.3%. • For 2009, Contraction of approximately -6 to -6.5% is projected. • It is among the hardest hit region in the world • Painful adjustment process with uncertain economic outlook • Forecasted 1% GDP growth in 2010

3. Among Fastest Growing Regions Globally until 2008 Average Annual GDP Growth 2000-2008

4. Negative Developments in 2009

5. Smaller Countries Continue to Fare Better

6. Regional Trends – Before Crisis • Volume of Intra-regional Trade Increasing • Volume of Intra-regional Investment Increasing • Increasing Number and Value of Cross-regional Investment • Promotion of Regional Economic Integration & Development

7. Trade: Regional Integration Trend Continued up to 2008

8. FDI Trend in BSEC since 2000

9. Impact of the Crisis- Financially (1) • At onset- access to financing disappeared/ markets froze • Economies deemed dependent on external financing flows hit hardest • Governments responded promptly and substantively to support banking systems & avert collapse • While financial sectors still seeking the ‘new normal’, FIs are reasonably capitalized and not main constraint to economic growth

10. Impact of the Crisis- Financially(2) • Financial systems relatively small - therefore damage less than elsewhere in E. Europe. • For most part in Black Sea Region financial crisis was limited- Ukraine an exception • Lending growth has slowed, but deleveraging limited • Black Sea Region mainly suffering a nasty economic crisis • Biggest risk to Regional financial sectors from NPLs resulting from economic downturn

11. Economic Crisis in Black Sea • Credit to businesses and 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

12. Emerging Europe Net Flows of Capital- IIF (Oct 2009)

13. Why was Central and Eastern Europe Highly Vulnerable? • pro-cyclical fiscal policy (deficits maintained in a period of rapid economic growth add an unnecessary stimulus which is both overheating the economy and making it difficult for governments to counteract downturns with increased levels of public spending and/or further tax cuts), • large current account deficits • private sector foreign financed domestic demand • lack of a domestic capital base and/or of domestic champions able to compete internationally

14. Lessons from the Crisis “Although the export-oriented growth model has been shaken by the crisis, many countries seem reluctant to recalibrate.”N. Roubini NYT 29/10/09 • Why? • Financial integration model shaken much more • International trust a casualty of crisis (not fatally) • E-OG offers greater security & self-reliance • The real economic decline may be aggravated by lack of credit, high interest rates and the absence of a significant fiscal stimulus • Lower foreign demand may result in declining rates of economic growth in the region

15. ‘Silver linings’ to the crisis • Not a debt crisis. In most countries debt levels low and debt servicing still comfortable • Financial systems small - therefore damage less than elsewhere in E. Europe • Governments responded promptly and substantively to support banking systems • IMF programs in Albania, Armenia, Georgia, Moldova, Romania, Ukraine • Foreign Direct Investment down but less than feared, may register 2.5-3% of GDP for 2009

16. Dealing with the Economic Crisis • Things a Country Can do on Own: • Fiscal & Monetary stimulus, if have FX reserves, low debt, budgetary ‘space’ for public investment • Improve business environment- ease of creation & operation of firms, support domestic capital creation • Promote transparency in markets, and improve public & private governance • Regime(s) for debt restructuring & workouts/ bank resolution & bankruptcy • Reorient trade towards regions with high growth, where demand is going to come from: Latin America, Middle East and North Africa, South-East Asia

17. Dealing with the Economic Crisis • Regional Level Options: • Information Exchange & Policy Dialogue • Institutional Cooperation/ Coordination of Policies • Legal Harmonization of Rules & Frameworks • Bilateral Swaps/ Multilateral Pooling • Scope for trade & investment facilitation • Cross-country projects- esp. for infrastructure (energy, transport, etc.) • Externally Supported Options: • Inclusion in pan-European support program for banks • Donor & IFI Assistance

18. Economic Perspectives Opportunities • Economies resilient & adaptable, willing to take difficult measures to turn things around. • Worst of contraction likely over for most countries, low positive growth likely in 2010. • High Investment in Infrastructure over next 10 years • Relocation of Foreign Production Capacity to the Region likely to continue

19. Economic Perspectives Risks • High Integration with World Economy – Vulnerability to external demand fluctuations • Risk of pro-cyclicality in fiscal policy – austerity measures aimed at reducing public deficits • Possibly Sustained High Interest Rates • Potential for Lower Capital Inflows • Potential for Declining Levels of Remittances

20. Key Regional Challenges for Future • Current Global Crisis- Returning to Path of High Economic Growth • Evolution of Political Economy Relations with External Actors, Especially EU Also: • Long Term Demographic Trends & Issues they Pose for (i) Need to Adapt Structurally, (ii) Quantity & Quality of the Workforce, (iii) Pressures on Government Finances • Improving the Competitiveness & Productivity of Regional Economies • Promoting Regional Cooperation

21. Can Greater Regional Focus Help Return to Higher Growth Rates? • An open question, will require political will & economic and institutional reforms to develop • Potential gains are higher for countries (i) Smaller in size; (ii) Relatively closed/ less linked to global economy • Focus on Regionalism may (over time) expand operating market of Regional banks & firms • Expanded scope for reciprocal benefiting • Improved sustainability- activity more firmly established, less ephemeral

22. Thank you