crisis and post-crisis challenges in the bank’s europe and

Meeting of Economy and Finance MinistersSouth East Europe Cooperation Process (SEECP)

April 8-10, 2010

Juan Zalduendo Lead Economist, Europe and Central Asia Region

World Bank

Crisis and Post-Crisis Challenges in the Bank’s Europe and Central Asia Region

Overview

ECA has been hit hard.Crisis response has been swift,but some risks remain.

Public finances have deteriorated.Public debt growing, though in most cases from low initial levels.

A new and tougher world for ECA countries.

What can the World Bank offer?

1. The 2008-09 Global

Financial Crisis


Financial Crisis

2. Impact on Public Finances


3. Key Challenges

Going Forward

3. Key Challenges

Going Forward

4. WB Strategy4. WB Strategy2

ECA region’s growth was hit hard by the crisis

Developing Asia

Latin America

Middle East & N. Africa ECA

Africa

GDP Growth, %

3

Source: IMF World Economic Outlook, World Bank World Development Indicators, and WB staff calculations.

Effects of the crisis on people has been severe

5

Unemployment has risen throughout the region

Recovery may be slow in creating jobs

Number of poor and vulnerable in 2009 rose

by about 12 million

Instead of falling by 10 mill. (pre-crisis

projection)

27 million change in 2010

Projected Impact of the Crisis on Poverty and Vulnerability, 2009Poor and Vulnerable, mln. people

Percentage Change in Employment between 2008 and 2009Based on Labor Force Survey Data

Protecting the most vulnerable is therefore crucial; in ECA scale up what works…

Higheris

better

Higher is better

Countries have sound means-tested programs—relativelygood accuracy, coverage can be improved, ‘generosity’ is quite varied

5Source: World Bank staff calculations.

…and yet some of the effects of the crisis are still evolving

Increase in NPLs signal distress

But remain lower than in East Asia and Latin America crisis of the 1990s—no currency crisis

“Zombie” banks need to be avoided; discourage regulatory forbearance, tackle capital needs

Triage banks (viable, viable but undercapitalized, insolvent)

Bank resolution frameworks and debt restructuring approaches—while using sensibly public monies

Non-performing loans (in %)

6Source: Country supervisory authorities and WB staff calculations.

World Bank crisis response—focused …Maintaining knowledge engagement allowed

crisis response with both expertise and financing• Lending volumes tripled to about $10bn in FY09 and $11bn in FY10

• Share of policy based lending (DPL) tripled

• Sharpest increase in EU member and EU candidate/potential countries; with IMF and EC as well as alone (Poland, ~$4bn; Turkey, ~$4bn by mid-2010; Croatia and Bulgaria)

• IFC financing $2.1bn and $3bn expected in FY10

• Increase in both Bank and IFC Advisory Services

Total ECA Commitments by Instrument ($bn)

Total ECA Commitments ($bn)

7Source: World Bank staff calculations.

Overview






Financial Crisis


Financial Crisis



3. Key Challenges

Going Forward

3. Key Challenges

Going Forward


ECA’s public finances were also hit hard by the crisis

ECA

Fiscal Balance, % of GDP

Developing Asia

Latin America

Middle East & N.

Africa

Africa

9Source: IMF World Economic Outlook, World Bank World Development Indicators, and WB staff calculations.

Countries’ fiscal stance in some cases went beyond automatic stabilizers …Decomposition of Change in Fiscal Balance in 2009

10

∆ = ∆ + ∆

Contractionary

Expansionary-10

-5

0

5

ALB BIH

BGR

HRV CZE ES

T

HUN LV

A

LTU

MN

E

POL

ROM

SRB

SVK

SVN

TUR

Fiscal balance (change from 2008) Change in fiscal stanceAutomatic stabilizers

% of GDP

Source: IMF World Economic Outlook, World Bank World Development Indicators, and WB staff calculations.

… as a result the pre-crisis public debt room is rapidly evaporating

Public Debt (% of GDP; median within group)


Overview






Financial Crisis


Financial Crisis



3. Key Challenges

Going Forward

3. Key Challenges

Going Forward


Short-term: region’s large governments present a challenge going forward—rigid social spending

Government Expenditure (% of GDP)


WE ctry. and govt. exp. as share of GDP; level and year in which same income per capita (real) as current ECA average

Medium-term: growth will be more difficult

Recessions associated with financial crisis that are synchronized • last longer• are deeper Recovery is slow and characterized by low growth

Reducing high leverage of Western European banks and recognizing write-offs may take time—this is of importance in some CEE and SEE countries

14

Average duration and change in output of recessions, by type

Average duration and change in output of recovery, by type

Source: IMF World Economic Outlook, April 2009

Long-term: pre-crisis bottlenecks are still there Survey based comparisons; BEEPS (28 transition economies (TEs)) and World Bank ICAs

• Taxes, labor regulation, infrastructure, worker skills, rule of law—resemble public goods

Vertical axis: measure of severity of constraint—higher is worse• Compare TEs (solid) to NTEs (dash); compare evolution in TEs across time (shift of lines)

Source: Mitra, Selowsky, and Zalduendo, 2009, Turmoil at Twenty, World Bank Press Book.15

Long-term: urgency in facing climate change (CC) challenges will become more pressing

18

Vulnerability to CC—Exposure, Sensitivity, Adaptability

ECA Countries are vulnerable to climate change

Energy Intensity of GDP (kt per GDP PPP, $2000)

ECA is most inefficient region in energy consumption terms

5 percent of world’s GDP but 10 percent of energy demand

ECA

Adaptation

Mitigation

1. Tajikistan2. Albania 3. Kyrgyz Republic

4. Armenia5. Georgia

Source: World Bank, 2009, Adapting to Climate Change in ECA, World Bank Press Book.

Overview






Financial Crisis


Financial Crisis



3. Key Challenges

Going Forward

3. Key Challenges

Going Forward


WB strategy: three main areas of action

18

• The energy intensity and carbon footprint of GDP are high.

• Sound adaptation and mitigation investments constitute win-win opportunities

Climate Action for Sustainable

Growth

crisis and post-crisis challenges in the bank’s europe and

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