the global and serbia’s economy lecture at the economic faculty belgrade, may 22, 2012 bogdan...

The Global and Serbia’s EconomyLecture at the Economic Faculty

Belgrade, May 22, 2012

Bogdan Lissovolik IMF Resident Representative for Serbia

OutlineOutline

Where are we?

Where are we going?

What are the risks?

What needs to be done?

Serbia’s economy?

WHAT IS IMF ? GLOBAL MEMBERSHIPWHAT IS IMF ? GLOBAL MEMBERSHIP

187 COUNTRIES REPRESENTEDNON-MEMBERS INCLUDE: CUBA, NORTH KOREA, ANDORRA, MONACO, NAURU, LIECHTENSTEIN

187 COUNTRIES REPRESENTEDNON-MEMBERS INCLUDE: CUBA, NORTH KOREA, ANDORRA, MONACO, NAURU, LIECHTENSTEIN

MANDATE: GLOBAL ECONOMIC & FINANCIAL STABILITYMANDATE: GLOBAL ECONOMIC & FINANCIAL STABILITYSHORT-TERM BALANCE OF PAYMENT SUPPORTFACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOMESHORT-TERM BALANCE OF PAYMENT SUPPORTFACILITATE EXPANSION IN TRADE, HIGH LEVELS OF EMPLOYMENT AND INCOME

PILLAR OF MULTILATERALISMPILLAR OF MULTILATERALISMPROMOTES ECONOMIC COOPERATIONCOMPLEMENTS THE UN, WORLD BANK, WTO & ILOPROMOTES ECONOMIC COOPERATIONCOMPLEMENTS THE UN, WORLD BANK, WTO & ILO

Where are we?Where are we?

Output Growth, 2011Q4


Public Debt(% of GDP)


10-Year Government Bond Yields


Capital Flows to Emerging Markets and Developing Economies($US billion; weekly)

Greece Crisis

Ireland Crisis

ECBLTRO


Unemployment rates

OutlineOutline

Where are we?

Where are we going?

What are the risks?


Serbia’s economy?

Where are we going?Where are we going?

Output Growth, 2012-13


The Brakes: Fiscal Consolidation(change in the structural balance; percentage points of potential GDP)

The Brakes: Bank Deleveraging


Projected Fall in Bank Lending Supply, 2012-13

Effect of Deleveraging on Output Level(% deviation from no-deleveraging scenario)

What Are The Drivers Of Bank Deleveraging?

Structural drivers…

• Balance sheet clean-up and shedding of legacy assets• Better capitalization• Reduce reliance on less stable funding sources

. . . shaped by cyclical financial and macro conditions

• Under adverse conditions capital generation more difficult• Funding pressures could also place strains on banks

10


Real GDP Growth

Sept. 2011 WEO

Sept. 2011 WEO

Advanced Economies Emerging and Developing Economies

OutlineOutline

Where are we?

Where are we going?

What are the risks?


Serbia’s economy?

What are the risks?What are the risks?

RISK 1:RISK 1:Euro Area Euro Area

CrisisCrisis

RISK 2:RISK 2:Oil PricesOil Prices

BANKSBANKS

viciouscycles

FISCALFISCAL

GROWTHGROWTH



Exports of Goods to the Euro Area

(2010)

Euro Area Bank Claims(% of GDP; Sep. 2011)

Eu

roA

rea

Em

ergi

ng

Eu

rop

e

Oth

er A

dv.

E

uro

pe

CIS

ME

NA

SS

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Dev

. A

sia

LA

C

Ad

v.A

sia

US

A+

CA

N

Em

ergi

ng

Eu

rop

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Oth

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dv.

E

uro

pe

US

A+

CA

N

LA

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CIS

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NA

Ad

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sia

SS

A


RISK 1:RISK 1:Euro Area Euro Area

CrisisCrisis

RISK 2:RISK 2:Oil PricesOil Prices


WEO Downside Scenario for a Disruption in the Global Oil Supply(% deviation from WEO baseline)


WEO Downside Scenario for a Disruption in the Global Oil Supply(percent or percentage point deviation from baseline)

GDP Loss after Two Years Rise in Inflation after One Year

OutlineOutline

Where are we?

Where are we going?

What are the risks?


Serbia’s economy?

What needs to be done? (policies)What needs to be done? (policies)

Fiscal policies: gradual consolidation

Monetary and liquidity policies should continue to be accommodative, if possible

Well-coordinated policy package – in most countries

Structural reforms to boost long-term productivity and employment

Support for the unemployed (social policies)

More international coordination of macro-financial policies

Strengthening the global firewall

Macro-prudential policies need to be strengthened


Implementation of a clear medium-term fiscal adjustment plan is a key requirement for sustainable growth, with support of fiscal institutions

Fiscal policy

Growth enhancing measures are very important for the fiscal accounts!

Fiscal adjustment should proceed at a steady pace (if there is fiscal space); not too fast not too slow

Challenges:Secure adjustment/reform without immediate market/political pressureDifficult dilemma if there is not fiscal space – no access to borrowing with high deficits…

FISCAL

ADJUSTMENT

Insufficient adjustment could undermine fiscal credibility and lead to fiscal crises, which would be bad for growth

Too much fiscal adjustment could

weaken aggregate

demand, which would be bad for

growth

Fiscal consolidation: Goldilocks Principle: “Not too hot, not too cold, just right” – depends on the specific

circumstances


Challenges: When and how to tighten monetary policy? – some program are time-limited

If inflation re-emerges while financial system/recovery is still fragile -- a difficult trade-off…

Restructuring central bank balance sheets after unconventional policies How to respond to the oil shock?What if fiscal consolidation sputters? How to communicate to anchor expectations?The challenge of unbalanced external position and foreign currency dominance in emerging markets – constrains scope for looser monetary policy.

Monetary policy Monetary and liquidity policies should continue to be accommodative -- in most countries, especially as weak demand continues to kip a lid on inflation;


Challenges: How to reduce reliance on unstable funding sources?How to limit de-leveraging?How to deal with NPLs and legacy assets?How to regulate cross-border transactions?

Macroprudential policy Adequate financial regulation, supervision, capitalization, liquidity, and crisis-management frameworks.

What needs to be done? (regions/countries)What needs to be done? (regions/countries)

Building a stronger currency union•Improved fiscal rules and institutions

Strengthening banking systems

Euro Area

What needs to be done? (countries/regions)What needs to be done? (countries/regions)

Rebuilding macroeconomic policy room

Strengthening prudential policies and frameworks

Promoting more inclusive growth

Most Emerging Market and Developing Economies

What needs to be done? (countries)What needs to be done? (countries)

Fostering domestic consumption, including through more exchange rate flexibility

Economies with Large External Surpluses

Economies with Large External Deficits

Developing a domestic policy mix to gradually rebalance toward a sustainable export-oriented growth, based on FDI and prudent macroeconomic policies

OutlineOutline

Where are we?

Where are we going?

What are the risks?

Serbia’s economy?


The “old-model” problem…

Still-large External Deficit

-25

-20

-15

-10

-5

0

-25

-20

-15

-10

-5

0

2004 2005 2006 2007 2008 2009 2010 2011

Current Account Deficit(percent of GDP)

Serbia SEE /1 CEE 2/

1/ Albania, Bosnia and Hercegovina, Croatia and Macedonia FYR.2/ New EU-10 excluding the Baltics.

And relatively high unit labor costs

With real wage outpacing productivity

And public debt becoming a problem

0

20

40

60

80

100

120

140

160

180Figure 2. Public Debt in Selected Economies, 2011(percent of GDP)

Sources: National authorities, IMF, and staff estimates

Fueled by public spending

0

10

20

30

40

50

60

Arm

en

ia

Alb

an

ia

Ma

ce

don

ia

Bu

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ria

Sw

itze

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nd

Ro

ma

nia

Ru

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k R

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Be

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Mo

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ark

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Figure 8. General Government Expenditure in Selected Economies, 2011 (percent of GDP)

sample average

With pension spending especially high

0

2

4

6

8

10

12

14

16

18

20P

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tan

In

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In

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Sp

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Pension expenditure

Advanced countries (average)

Emerging countries (average)


Figure 9. Pension Expenditure, 2010(percent of GDP)

What to do?

✤ 1. Fiscal consolidation through structural reforms of spending (pensions, wage bill)

✤ 2. Product market reforms

✤ 3. Labor market reforms

Attract the right kind of FDI

0

1000

2000

3000

4000

5000

2004 2005 2006 2007 2008 2009 2010 2011*

Manufacturing Wholesale and retail trade, repair

Transport, storage and communications Financial intermediation

Real estate, renting and business activities Other

Gross FDI by branch of activity, million euro

Reform severance benefits

Thank YouThank You

the global and serbia’s economy lecture at the economic faculty belgrade, may 22, 2012 bogdan...

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