1. What we are seeing, what should we expect, and what can be done
Europe and Central Asia
What we are seeing, what should we expect, and what can be done

2. What we have seen ECA entered the crisis vulnerable
With macroeconomic and financial indicators showing more vulnerabilities relative to other emerging regions
But considerable differences within ECA
Countries with weaker fiscal, financial, and social policies have been hit harder
Markets recognize these differences
Weaknesses are being punished more severely, and strengths rewarded

3. What we can expect A deeper crisis than expected
Forecasts for the region may still be too optimistic
A longer crisis than what is being anticipated
Past crises indicate that capital flows do not quickly recover to pre-crisis levels
A crisis that will leave the region changed
Post-crisis growth is likely to be lower than pre-crisis growth rates in ECA

4. What we should do Fiscal policy options are limited
Most countries do not have space for fiscal stimulus programs
Possible exceptions are some middle-income CIS economies such as Russia and Kazakhstan
Financial policy measures are necessary
To stabilize banking systems, not individual banks
Especially for economies with strong financial ties to western banks such as the EU new member states and the Balkans
Social policy actions are a priority
Region has started to give back poverty gains of the last decade
Most countries in the region have social programs that can be strengthened and scaled up to provide targeted assistance

5. Poverty projected to increase

6. What we have seen

7. The slowdown is sharpest in ECA
Growth is expected to fall more than in other emerging regions
GDP growth (annual percent change)

8. But liquidity problems vary within ECA
Short term debt to FX reserves ratios vary, with some CEE countries having large numbers while some CIS and SEE countries look comfortable.
ECA countries
Non-ECA countries
Greenspan-Guidotti rule; risk zone for values above 1.0
Source: WEO and DEC.

9. Large variation in debt ratios too
Many ECA countries have high external debt when compared to other emerging market economies, but some do much better
40-60% is risk area
in previous KACs;
though not all ECA
subject to KAC risks
FYR Macedonia
ECA countries
Non-ECA countries
Source: WEO and DEC.

10. Exchange rate regimes vary as well
Rigid exchange rate regimes have pros and cons; today the cons are more evident.
ECA countries
Non-ECA countries
Source: IMF AREAER.

11. Bank borrowing varies in the region
Loan-to-deposit ratios are especially high in Ukraine, Belarus, and the Baltics
Loan-to deposit ratio, 2008

12. Safety nets are less suited for crises
ECA spends a lot on social insurance, but less on social assistance programs

13. Social assistance programs also vary
ECA countries spend more than 2 percent of GDP on social assistance, but targeting efficiency varies
FYR
Fiscal Effort
Coverage of Poorest

14. Unemployment rising, but not everywhere (though it is still early)
Change in registered unemployed, latest month compared to 12 months earlier

15. What we can expect

16. Growth forecasts were too rosy
Forecasts for economic growth in 2009 have come down a lot, with the sharpest adjustments in growth for ECA

17. But it may have been unusual
Growth in low and middle income countries was unusually high relative to high income economies since 2000
Global IP 12m/12m % (monthly) growth
High-income
Low- and middle-income
Source: World Bank, DEC Prospects Group.

18. The region’s financing needs are big
Potential financing gaps in the region could be as much $300 billion using assumptions on foreign credit and investment flows that draw on past crisis experiences

19. What should be done

20. The decade was a good one for ECA
Helped by international trade, financial and labor flows, regional GDP grew by two-thirds of its level in 2000

21. Fiscal stimulus spending may be possible in some economies
Note: These reflect measures above and beyond the affects of automatic stabilizers.

22. But fiscal stimulus spending is not an option for much of ECA
Fiscal space available to undertake a fiscal stimulus program for countering the impact of the financial crisis, based on World Bank staff assessments in early 2009

23. Trade channels must be kept open…
Product market linkages which channeled prosperity to the region over the last decade must be kept open during the crisis

24. Many ECA countries have foreign bank ownership which have brought benefits
Banks in Central and Southern Europe are generally foreign owned
Foreign banks share in total banking sector assets (in %; end-2007)

25. …and should stay financially integrated.
Financial market linkages which channeled prosperity to the region over the last decade must be kept open during the crisis
Parent-daughter links are likely to be stronger than other private flows
Three Examples of Dependence to Western European Banks
Source: Zsofia Arvai, Karl Driessen, and Inci Otker Robe, 2009, "Regional Financial Interlinkages and Financial Contagion within Europe," IMF, WP/09/06; BIS data at end-2007.

26. Poverty gains are now at risk
Human Crisis?
Poverty gains are now at risk
A 2.6 percentage point increase in poverty and 7.1 percentage point increase in poor or vulnerable is likely by end of 2010
$2.5 a Day Poverty Rate Projections (%)
$5 a Day Poverty and Vulnerability
Projections (%)
Source: World Bank staff estimates. 26

27. But most countries have programs that can be improved and expanded
Potential to build on existing programs
Few lack well-targeted program
One or more targeted program, though often with low coverage
High spending,
weak programs
Low spending,
weak programs
LICs / Lower MICs
Albania (NE Program),
Armenia (FPB)
Azerbaijan (TSA)
Georgia (TSA)
Kyrgyz (UMB, MSB)
Macedonia (SB with reforms)
Ukraine (Ext. Poor program)
LICs / Lower MICs
Moldova
Bosnia & Herz.
Belarus (TBC)
LICs
Tajikistan
Upper MICs
Bulgaria (GMI)
Croatia (Support Allowance)
Estonia (GMI + FA)
Latvia (GMI + TFA)
Romania (GMI)
Serbia (MOP)
Turkey (CCT, Green Card)
Upper MICs
Russia
Hungary
Kazakhstan
MICs
n.a.

28. Migration channels must be kept open
Labor market linkages which channeled prosperity to the region through migration over the last decade should be kept open during the crisis

29. Messages Fiscal policy options during the crisis are limited
ECA countries were vulnerable, but there are also large differences among countries in the region
With 7 months of the crisis, the region has started to lose the poverty gains made over the last 10 years
Fiscal policy options during the crisis are limited
Keeping trade channels open is the most promising way for ECA countries to benefit from fiscal policy
But financial measures are possible and necessary
Keeping capital market linkages strong is the only way for ECA countries to finance some of their financing needs
And social policy actions should be a priority
Keeping labor market channels open is necessary, but not sufficient.
ECA countries spend large sums on social protection, and have the mechanisms necessary to target assistance to the poor and vulnerable

30. Messages Human Crisis Looming in Europe and Central Asia
Since 1999, some 90 million people were lifted out of poverty and vulnerability in Europe and Central Asia
Today, global crisis pushing almost 35 million people back into poverty and vulnerability