1. Economic Update The Crisis Hits Home Office of the Chief Economist Human Development Sector Management Unit Poverty and Economic Management Sector Management Unit Europe and Central Asia Region World Bank Annual Meetings Istanbul, October 2009

2. 2 Main points Good news for enterprises, but foreign debt clouds the future Industrial production stopped falling in mid-2009 But $350 billion of external debt due in 2010 Bad news for families as poverty and unemployment rise, while household debt clouds the future Poverty will rise by almost 15 million instead of falling by 15 million in 2009 Stress tests indicate more debt distress likely for households in 2010 Tough times ahead for governments, and social security debt clouds the future Fiscal deficits will rise from 1.5 to 5.5 percent of GDP in 2009 Stress tests indicate pension deficits rising to 5-6 percent of GDP

3. 3 Good news for enterprises, but foreign debt clouds future

4. 4 Industry has stopped shrinking Developing Industrial production, percentage change (saar) Latin America Europe & Central Asia Source: World Bank, DEC Prospects Group. South Asia Middle-East & North AfricaEast Asia & Pacific

5. 5 Interest rates are lower Emerging-market bond spreads have fallen but remain higher than pre-crisis levels Source: World Bank, DEC Prospects Group Before Lehman Brothers Sovereign bonds (EMBI Global) Corporate bonds (CEMBI Global)

6. Business regulations are better Countries that made at least one positive reform in 2008 (%) Leading Ten Doing Business Reformers in 2008 6 1. Rwanda 2. Kyrgyz Republic 3. Macedonia, FYR 4. Belarus 5. United Arab Emirates 6. Moldova 7. Colombia 8. Tajikistan 9. Egypt, Arab Rep 10. Liberia Source: World Bank, Doing Business 2009

7. 7 But debt obligations loom large Source: World Bank, DEC Prospects Group More than $350 billion of ECA’s foreign debt matures in 2010

8. Bad news for families as poverty and unemployment rise, while household debt distress clouds the future 8

9. 9 Poverty will rise Source: World Bank Staff Increases in poverty and vulnerability (change in people living on <$5/day) This graph needs to be redone, with a stacked bar chart with both Poverty (<$2.50) and vulnerability (2.50-5.00)

10. 10 Poverty will rise everywhere Note: Estimates are not comparable across countries. Source: World Bank Staff Share of households below national poverty lines

11. 11 Rising job losses Source: World Bank Staff Registered unemployment has risen in almost every country since mid-2008

12. 12 Job losses most in middle-income ECA Source: World Bank Staff Growth of unemployment rates, 2009 over 2008, percent

13. 13 Unemployment in Turkey has doubled Source: World Bank staff Registered unemployment in Turkey, February 2008 to August 2009

14. Incomes in Turkey have been falling 14 Evidence from Turkey finds a particularly large hit to self employment income Source: World Bank-UNICEF Survey

15. 15 The sources of household distress Source: World Bank 2009: The Crisis Hits Home Shocks are transmitted to households through financial, product and labor markets

16. 16 Household stress tests show distress Source: World Bank Staff Severe Stress likely in Bosnia, Croatia, Estonia and Hungary

17. Tough times ahead for governments, and pension debt clouds the future 17

18. 18 Rapid fiscal deterioration in 2009 Source: World Bank Staff Central and Eastern European government accounts were hit sooner

19. 19 Social protection spending ECA spends a lot on public pensions (percent of GDP) Source: World Bank staff estimates and OECD Social Expenditure Database. Most data from 2000 to 2003.

20. 20 Good coverage of social assistance Source: World Bank Staff Is lowest in ECA’s poorest countries, but compares favorably with other regions

21. 21 And reasonable targeting Source: World Bank Staff Not all goes to poor, but accuracy compares favorably with programs in other regions

22. 22 Reforms needed for social security Source: World Bank staff The reforms that help the most are inflation indexing and higher retirement ages

23. 23 Crisis is not over. Countries in Emerging Europe and Central Asia face a slow recovery No green shoots for workers Tighter money ahead. Post-crisis growth will likely be lower, and fiscal deficits higher Smaller budgets for governments Fiscal consolidation, not indiscriminate cuts. More efficiency of spending can mean more growth and more equity Better prospects for both families and firms Messages

24. 24 How the World Bank is helping Supporting budgets Increased lending (IBRD/IDA): $3.8bn in 2007, $4.2bn in 2008, $9.3bn in 2009 Operations in Armenia, Bulgaria, Georgia, Hungary, Latvia, Poland, Romania, Serbia, Tajikistan, Turkey, and Ukraine Strengthening institutions Helping countries such as Belarus, FYR Macedonia and Turkey improve social assistance programs Helping middle income countries strengthen banking systems Helping all countries improve social service delivery mechanisms Improving policies Public expenditure reviews, e.g., in Poland, Lithuania, Russia, and Latvia to identify areas for efficiency Economic reports, e.g., in Croatia and Central Asia to strengthen integration in Europe and Eurasia

25. More information World Bank, 2009: The Crisis Hits Home: Stress Testing Households in Europe and Central Asia, Report No. 50158-ECA. bquillin@worldbank.org kschrader@worldbank.org 25