The Global Economic Crisis and the South Caucasus Countries:

Prospects for Recovery and Growth

Asad AlamRegional Director

March 2010

The World Bank

1

CONTENT

1. The Global Economic Crisis2. Key Transmission Channels3. Recovery and Growth

2

A global economic recovery process, which started with the large emerging economies, is now under-way

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

80859095

100105110115120125130

World Industrial ProductionIndex Jan/2006=100

Ad-vanced

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

120125130135140145150155160165170

World Trade VolumeSeasonalt Adjusted, Index 2000=100

Exports

Imports

3

The crisis has “hit home” in South Caucasus…

Q1'

07

Q2'

07

Q3'

07

Q4'

07

Q1'

08

Q2'

08

Q3'

08

Q4'

08

Q1'

09

Q2'

09

Q3'

09

0102030405060708090 Exports, % of GDP

Armenia Azerbaijan Georgia

Q1'

07

Q2'

07

Q3'

07

Q4'

07

Q1'

08

Q2'

08

Q3'

08

Q4'

08

Q1'

09

Q2'

09

Q3'

09

0

5

10

15

20

25 Remittances, % of GDP

Armenia Azerbaijan GeorgiaQ

1'07

Q2'

07

Q3'

07

Q4'

07

Q1'

08

Q2'

08

Q3'

08

Q4'

08

Q1'

09

Q2'

09

Q3'

09

0

5

10

15

20

25

30

35FDI inflows, % of GDP

Armenia Azerbaijan Georgia 4

0107

0307

0507

0707

0907

1107

0108

0308

0508

0708

0908

1108

0109

0309

0509

0709

0909

1109

-20

0

20

40

60

80

100

120

Growth of Credits, %

Armenia Azerbaijan Georgia

0107

0307

0507

0707

0907

1107

0108

0308

0508

0708

0908

1108

0109

0309

0509

0709

0909

1109

40

50

60

70

80Dollarization of Deposits, % of total

Armenia Azerbaijan Georgia

QT

107

QT

207

QT

307

QT

407

QT

108

QT

208

QT

308

QT

408

QT

109

QT

209

QT

309

QT

409

4

6

8

10

12

14

Interest Rate Spreads, %

Armenia (nominal) Armenia (real)Azerbaijan (nominal) Azerbaijan (real)

The crisis has “hit home” in South Caucasus…

5

Growth is lower…

6

…and poverty is higher

7

Budgets are under stress…

2008 (act.) 2009 (prelim.) 2010 (budget)

-10

-5

0

5

10

15

20

State Budget Deficit, (% of GDP)

Armenia (Central Government) Georgia (General Government)Azerbaijan (General Government)

2008 (act.) 2009 (prelim.) 2010 (budget)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

State Budget Expenditure,(% of GDP)

Armenia (Central Government) Georgia (General Government)Azerbaijan (General Government)

2008 (act.) 2009 (prelim.) 2010 (budget)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

State Budget Revenue, (% of GDP)

Armenia (Central Government) Georgia (General Government)Azerbaijan (General Government)

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

10

20

30

40

50

60 Public External Debt, % of GDP

Armenia Azerbaijan Georgia 8

• Labor Force – Shrinking and Aging Population

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

40

50

60

70

80Population 15-64 %

Armenia Azerbaijan Georgia

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

0

10

20

30

40population 60+ %

Armenia Azerbaijan Georgia

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-100

0

100

200

300

400

500

600 Emerging and Developing non-oil expoting coun-tries: Private Capital Net Flows, Billion of USD

Factors of production are constrained

• Foreign private capital - Access to be scarcer and costlier

9

The crisis has changed the world

– Poverty and inequality have risen, eroding past gains– Access to foreign private capital will likely be scarcer and costlier;

suggests productivity enhancements will be more important– Sectoral growth drivers need to be rebalanced; less reliance on

construction and financial services– Policy/institutional frameworks to attract scarce FDI carry a

higher premium– Risk management and mitigation is a must—e.g. through

strengthening social safety nets, and diversifying trade

10

Productivity is key to growth prospects

Emphasis on Business Environment and Technology

– Openness/Export orientation

– Labor skills

– Infrastructure

– Tax policy

– Trade facilitation

– Low cost of business transaction

– Macro stability

11

12

THANK YOU

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