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The Global and Serbia’s Economy

The Global and Serbia’s Economy. Lecture at the Economic Faculty Belgrade, May 22, 2012 Bogdan Lissovolik IMF Resident Representative for Serbia. Outline. Where are we?. Where are we going?. What are the risks?. What needs to be done?. Serbia’s economy?. Outline. Where are we?.

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The Global and Serbia’s Economy

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  1. The Global and Serbia’s Economy Lecture at the Economic Faculty Belgrade, May 22, 2012 Bogdan Lissovolik IMF Resident Representative for Serbia

  2. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

  3. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

  4. What is IMF ? Global Membership 187 countries represented Non-members include: Cuba, North Korea, Andorra, Monaco, Nauru, Liechtenstein Mandate: Global Economic & Financial Stability Short-term balance of payment support Facilitate expansion in trade, high levels of employment and income Pillar of Multilateralism Promotes economic cooperation Complements the UN, World Bank, WTO & ILO

  5. Where are we? Output Growth, 2011Q4

  6. Where are we? Public Debt (% of GDP)

  7. Where are we? 10-Year Government Bond Yields

  8. Where are we? Capital Flows to Emerging Markets and Developing Economies ($US billion; weekly) Greece Crisis Ireland Crisis ECB LTRO

  9. Where are we? Unemployment rates

  10. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

  11. Where are we going? Output Growth, 2012-13

  12. Where are we going? The Brakes: Fiscal Consolidation (change in the structural balance; percentage points of potential GDP)

  13. Projected Fall in Bank Lending Supply, 2012-13 Effect of Deleveraging on Output Level (% deviation from no-deleveraging scenario) Where are we going? The Brakes: Bank Deleveraging

  14. 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

  15. Where are we going? Real GDP Growth Advanced Economies Emerging and Developing Economies Sept. 2011 WEO Sept. 2011 WEO

  16. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

  17. RISK 1: Euro Area Crisis RISK 2: Oil Prices What are the risks?

  18. What are the risks? GROWTH vicious cycles FISCAL BANKS

  19. What are the risks? GROWTH vicious cycles FISCAL BANKS

  20. What are the risks? Euro Area Bank Claims (% of GDP; Sep. 2011) Exports of Goods to the Euro Area (2010) Other Adv. Europe Other Adv. Europe Emerging Europe Emerging Europe USA+CAN USA+ CAN MENA MENA Adv. Asia Adv. Asia LAC LAC Euro Area Dev. Asia SSA SSA CIS CIS

  21. RISK 1: Euro Area Crisis RISK 2: Oil Prices What are the risks?

  22. What are the risks? WEO Downside Scenario for a Disruption in the Global Oil Supply (% deviation from WEO baseline)

  23. What are the risks? 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

  24. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

  25. What needs to be done? (policies) Well-coordinated policy package – in most countries Fiscal policies: gradual consolidation Monetary and liquidity policies should continue to be accommodative, if possible Macro-prudential policies need to be strengthened 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

  26. What needs to be done? (policies) Fiscal policy Fiscal adjustment should proceed at a steady pace (if there is fiscal space); not too fast not too slow Implementation of a clear medium-term fiscal adjustment plan is a key requirement for sustainable growth, with support of fiscal institutions Growth enhancing measures are very important for the fiscal accounts! • Challenges: • Secure adjustment/reform without immediate market/political pressure • Difficult dilemma if there is not fiscal space – no access to borrowing with high deficits…

  27. Fiscal consolidation: Goldilocks Principle: “Not too hot, not too cold, just right” – depends on the specific circumstances Too much fiscal adjustment could weaken aggregate demand, which would be bad for growth Insufficient adjustment could undermine fiscal credibility and lead to fiscal crises, which would be bad for growth FISCAL ADJUSTMENT

  28. What needs to be done? (policies) 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: • 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.

  29. What needs to be done? (policies) Macroprudential policy • Adequate financial regulation, supervision, capitalization, liquidity, and crisis-management frameworks. • 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?

  30. What needs to be done? (regions/countries) Euro Area • Building a stronger currency union • Improved fiscal rules and institutions Strengthening banking systems

  31. What needs to be done? (countries/regions) Most Emerging Market and Developing Economies Rebuilding macroeconomic policy room Strengthening prudential policies and frameworks Promoting more inclusive growth

  32. What needs to be done? (countries) Economies with Large External Surpluses Fostering domestic consumption, including through more exchange rate flexibility 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

  33. Outline Where are we? Where are we going? What are the risks? What needs to be done? Serbia’s economy?

  34. The “old-model” problem…

  35. Still-large External Deficit

  36. And relatively high unit labor costs

  37. With real wage outpacing productivity

  38. And public debt becoming a problem

  39. Fueled by public spending

  40. With pension spending especially high

  41. What to do? • 1. Fiscal consolidation through structural reforms of spending (pensions, wage bill) • 2. Product market reforms • 3. Labor market reforms

  42. Attract the right kind of FDI

  43. Reform severance benefits

  44. Thank You

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