Is there light at the end of the tunnel?
Thu, Jul 02 2009 10:13 CET
Since the onset of the financial crisis in the autumn of 2008, the global economic environment continued to worsen in the first quarter of 2009. It appears to be slightly easing in the second quarter. The Balkans is among the regions most adversely affected, reflecting dramatic GDP contraction and numerous external challenges (e.g. large current account deficits, shortfalls in foreign currency inflows and declining export capacity).
All countries in the region - with the possible exception of Albania - are expected to register a sharp output decline. Romania, Serbia and Bulgaria are particularly adversely affected. On average, GDP contraction will reach minus 3.2 per cent for the entire region in 2009. Such a freefall in their economies is only comparable to the initial transition period in the early 1990s.
International funding institutions have come to the rescue of eight countries in Central, Eastern and South East Europe. Between October 2008 and May 2009, they have provided about $108 billion of emergency lending to Romania, Serbia, Ukraine, Belarus, Hungary, Poland, Bosnia and Herzegovina and Latvia to weather the economic and financial crises. Other countries such as Albania, Croatia and Bulgaria are currently considering their options.
These interventions represent an unprecedented level of co-operation between the IMF, World Bank, EBRD and EU. They also expressed a powerful message; namely that East, Central and South East Europe, including the Balkans, has a safety net that will be extended across the regions by the international [financial] community!
The full extent of the financial sector crisis in the region has yet to translate into the real economy. Three areas are of particular importance:
(i) credit volumes to households and the corporate sector remain conditioned by the risk of rising non-performing loans and eventual debt defaults;
(ii) bank de-leveraging after years of excessive credit growth, in particular mortgages, consumer loans, corporate finance and credit card debt;
(iii) uncertainty over the future engagement of Western parent banks – including Greek financial institutions - vis-a-vis their local subsidiaries in the Balkans.
The level of non-performing loans (NPLs) is currently the most important risk indicator for the stability of commercial banking in the Balkans.
Together with accelerated credit contraction rising NPLs exert significant burdens on banking operations in the region. It is only a matter of time until this combination of financial sector stress factors filter through into the real economy.
Social implications of the economic and financial crises
The economic contraction in the Balkans is re-ordering citizens’ assessments about their future expectations in areas such as employment, wages, welfare services and the availability of banking credit. In practice, austerity programs are gradually rippling down the social hierarchy, with adjustments taking place in every segment of society.
The rescue packages from the IMF, the World Bank and the EU include painful conditionalities that will have to be met with budget cuts and public spending limitations during 2009/10. The measures are primarily affecting public sector employees, reduced funding for cities and local administration as well as retirement benefits. The social implications of such conditionalities are dire and subject to public controversy.
One key indicator is remittances. According to the World Bank, money sent home by migrant workers to their families in the Balkans is set to fall by up to 13 per cent in 2009. The regional impact of lower remittances is further influenced by country-specific currency arrangements. Through the depreciation of domestic currencies, non-euro countries such as Albania, Bulgaria, FYR Macedonia, Romania and Serbia will be more adversely affected than Montenegro and Kosovo where the euro is legal tender.
Outlook
Any economic forecast for the Balkans is currently fraught with considerable uncertainty in both downside and upside directions. The best these countries can hope for during 2009/10 are some green shoots emerging. But they will have to continue identifying the necessary remedies in order to manage ongoing economic and political volatility. Each country has weaknesses that could hamper a long-term economic recovery in the region.
Exports and foreign direct investment flows, critical for many markets in the Balkans, are still anaemic in the second quarter 2009. Export capacity to EU countries has been particularly hurt by the downturn. Countries in the Balkans have relatively small domestic economies that can hardly compensate weaker demand from Germany, Austria, Italy and France.
Rising budget deficits in places like Albania, Serbia, Romania and even Bulgaria limit the fiscal space available to policy makers to stimulate their economies. Moreover, industrial production in Balkan economies has not rebounded, nor have levels of retail sales shown any signs of bottoming out.
Technically, most countries may be moving out of recession in 2010. But the trend growth rate of most countries in the region will be much closer to one to three per cent than five to eight per cent in the coming years. Such levels constitute a major re-adjustment of GDP growth expectations in the Balkans! This will have consequences for foreign direct investment and the business plan priorities of Greek banks in the region.
The broader concerns across the region are twofold. One is political. How will different constituencies react to economic lean times and a perception that their hard-earned gains have been erased? Voters, forced by recession to live more leanly, are irate as was evidenced in the recent EU parliamentary elections in Romania and Bulgaria as well as the general election from last week in Albania.
The second issue concerns where and how the recovery will come from? Governments and the international community have started to implement emergency lending programs in order to confront short-term requirements. But they are nowhere near recognising what will need to be done medium-to long-term in Belgrade, Bucharest, Sofia, or Tirana. This endeavor includes re-thinking how governments in the region can generate additional fiscal space without having to rely so strongly on emergency funding from abroad.
The social implications of the crisis also require re-evaluating the pillars of the social safety net. This is exactly the time when the importance of having a decent social safety net is driven home to everybody in the Balkans.
In sum, thought-provoking choices about the nature of their political economies will have to be made after the crisis and before the recovery.
*Jens Bastian is a Senior Economic Research Fellow at the Hellenic Foundation for European and Foreign Policy, ELIAMEP, in Athens.
All countries in the region - with the possible exception of Albania - are expected to register a sharp output decline. Romania, Serbia and Bulgaria are particularly adversely affected. On average, GDP contraction will reach minus 3.2 per cent for the entire region in 2009. Such a freefall in their economies is only comparable to the initial transition period in the early 1990s.
International funding institutions have come to the rescue of eight countries in Central, Eastern and South East Europe. Between October 2008 and May 2009, they have provided about $108 billion of emergency lending to Romania, Serbia, Ukraine, Belarus, Hungary, Poland, Bosnia and Herzegovina and Latvia to weather the economic and financial crises. Other countries such as Albania, Croatia and Bulgaria are currently considering their options.
These interventions represent an unprecedented level of co-operation between the IMF, World Bank, EBRD and EU. They also expressed a powerful message; namely that East, Central and South East Europe, including the Balkans, has a safety net that will be extended across the regions by the international [financial] community!
The full extent of the financial sector crisis in the region has yet to translate into the real economy. Three areas are of particular importance:
(i) credit volumes to households and the corporate sector remain conditioned by the risk of rising non-performing loans and eventual debt defaults;
(ii) bank de-leveraging after years of excessive credit growth, in particular mortgages, consumer loans, corporate finance and credit card debt;
(iii) uncertainty over the future engagement of Western parent banks – including Greek financial institutions - vis-a-vis their local subsidiaries in the Balkans.
The level of non-performing loans (NPLs) is currently the most important risk indicator for the stability of commercial banking in the Balkans.
Together with accelerated credit contraction rising NPLs exert significant burdens on banking operations in the region. It is only a matter of time until this combination of financial sector stress factors filter through into the real economy.
Social implications of the economic and financial crises
The economic contraction in the Balkans is re-ordering citizens’ assessments about their future expectations in areas such as employment, wages, welfare services and the availability of banking credit. In practice, austerity programs are gradually rippling down the social hierarchy, with adjustments taking place in every segment of society.
The rescue packages from the IMF, the World Bank and the EU include painful conditionalities that will have to be met with budget cuts and public spending limitations during 2009/10. The measures are primarily affecting public sector employees, reduced funding for cities and local administration as well as retirement benefits. The social implications of such conditionalities are dire and subject to public controversy.
One key indicator is remittances. According to the World Bank, money sent home by migrant workers to their families in the Balkans is set to fall by up to 13 per cent in 2009. The regional impact of lower remittances is further influenced by country-specific currency arrangements. Through the depreciation of domestic currencies, non-euro countries such as Albania, Bulgaria, FYR Macedonia, Romania and Serbia will be more adversely affected than Montenegro and Kosovo where the euro is legal tender.
Outlook
Any economic forecast for the Balkans is currently fraught with considerable uncertainty in both downside and upside directions. The best these countries can hope for during 2009/10 are some green shoots emerging. But they will have to continue identifying the necessary remedies in order to manage ongoing economic and political volatility. Each country has weaknesses that could hamper a long-term economic recovery in the region.
Exports and foreign direct investment flows, critical for many markets in the Balkans, are still anaemic in the second quarter 2009. Export capacity to EU countries has been particularly hurt by the downturn. Countries in the Balkans have relatively small domestic economies that can hardly compensate weaker demand from Germany, Austria, Italy and France.
Rising budget deficits in places like Albania, Serbia, Romania and even Bulgaria limit the fiscal space available to policy makers to stimulate their economies. Moreover, industrial production in Balkan economies has not rebounded, nor have levels of retail sales shown any signs of bottoming out.
Technically, most countries may be moving out of recession in 2010. But the trend growth rate of most countries in the region will be much closer to one to three per cent than five to eight per cent in the coming years. Such levels constitute a major re-adjustment of GDP growth expectations in the Balkans! This will have consequences for foreign direct investment and the business plan priorities of Greek banks in the region.
The broader concerns across the region are twofold. One is political. How will different constituencies react to economic lean times and a perception that their hard-earned gains have been erased? Voters, forced by recession to live more leanly, are irate as was evidenced in the recent EU parliamentary elections in Romania and Bulgaria as well as the general election from last week in Albania.
The second issue concerns where and how the recovery will come from? Governments and the international community have started to implement emergency lending programs in order to confront short-term requirements. But they are nowhere near recognising what will need to be done medium-to long-term in Belgrade, Bucharest, Sofia, or Tirana. This endeavor includes re-thinking how governments in the region can generate additional fiscal space without having to rely so strongly on emergency funding from abroad.
The social implications of the crisis also require re-evaluating the pillars of the social safety net. This is exactly the time when the importance of having a decent social safety net is driven home to everybody in the Balkans.
In sum, thought-provoking choices about the nature of their political economies will have to be made after the crisis and before the recovery.
*Jens Bastian is a Senior Economic Research Fellow at the Hellenic Foundation for European and Foreign Policy, ELIAMEP, in Athens.