Economic Developments and Reform in the Eastern Europe and Caucasus (EEC) Countries

1. Economic Developments and Reform in the Eastern Europe and Caucasus (EEC) Countries Christopher Falco EBRD, Senior Banker Baku, 27 May 2010 ABA/EBF Conference

2. The EEC region is in crisis but shows some signs of recovery • The region was not affected uniformly by the crisis. The crisis emphasised once more the importance of economic diversification for long-term sustainability • Low financial integration implied low impact on banking sectors due to closure of international financial markets (except Georgia, and to a less extent Azerbaijan)

3. Double-digit declines (Ukraine, Armenia) Average output declined 9% in 2009 Crisis is not over: rising non-performing loans continuing low availability of credit GDP growth slowed-down across the region mainly due to lower external demand, lower commodity and oil prices, lower export demand, and lower remittances The EEC region is in crisis but shows some signs of recovery

4. Accumulated macro-economic imbalances Weak institutional environments Crisis management frameworks Dependence on few commodity based exports Dollarisation of corporate and household liabilities Sudden currency collapses Factors leading to the crisis

5. New EU member states could mitigate the impact of the crisis Trade and financial integration to the EU led to growth in EEC Improve domestic and international policy frameworks to better manage future economic booms Building institutions and improving how the state interacts with the private sector The Eastern partnership framework can strengthen their institutions and reduce their future economic volatility Without EU partnership EEC countries may suffer a permanent reassessment of investors’ sentiment Help in Mitigating the Crisis

6. Real GDP growth has slowed down Sources: EBRD

7. Remittances decrease sharply in 2009:2010 outlook is promising Source: EBRD and IMF IFS database Note: Quarterly data are seasonally adjusted

8. Non-performing loans of banks have increased significantly Sources: National Banks

9. Average Inflation Source: EBRD and IMF IFS database Note: Quarterly data are seasonally adjusted

10. Transition Factors • Population • Private Sector Share • Enterprise: • Large& Small-scale privatisation • Governance and Enterprise restructuring • Markets and Trade: • Price liberalisation & Competition Policy • Trade and Foreign exchange system • Financial Institutions: • Banking reform and interest liberalisation • Securities markets and non-bank financial institutions • Infrastructure Reform: • Electric Power • Railways & Railroads • Telecommunications • Water and Wastewater

11. Reform momentum in the region slowed in 2009, with only a few transition reversals… Source: EBRD

12. Some progress with reforms but a lot remains to be done • I-phase, “market enabling” reforms of market liberalisation and small-scale privatisation largely completed. • II- phase “Market deepening” reforms of large-scale privatisation and financial sector reform slow progress • III-phase, “market sustaining” reforms – governance and enterprise restructuring, competition policy and infrastructure – remain at early stage. Transition score

13. BEEPS: Main obstacles across the region are taxes, finance, education and political instability Education of workforce Pol. instability Informal sector competition Access to finance Tax rates Corruption

14. BEEPS: Most serious obstacles to business by country and firm size: Armenia • Access to finance, competition and tax rates similar • Armenia: customs and political instability • Azerbaijan: corruption • Georgia: political instability and crime

15. BEEPS: Most serious obstacles to business by country and firm size: Azerbaijan • Access to finance, competition and tax rates similar • Armenia: customs and political instability • Azerbaijan: corruption • Georgia: political instability and crime

16. BEEPS: Most serious obstacles to business by country and firm size: Georgia • Access to finance, competition and tax rates similar • Armenia: customs and political instability • Azerbaijan: corruption • Georgia: political instability and crime

17. Some business obstacles are still different in the transition region • Obstacle categories in which transition region underperforms (driven by EEC+R+CA including ETC countries): • business licenses and permits • functioning of the judiciary • Crime • Obstacles that play about the same role on average in transition and non-transition countries: • access to finance • political instability • tax rates • competitors in the informal sector

18. Corporate Energy and infrastructure Financial institutions Agri- General Property Telecom Municipal Natural Power Sustainab Transport Banking Non-bank MSMEs Private business industry and municatio and resources le energy financial equity and tourism ns environ- institutions capital mental markets infrastruct ure CEB countries 2.00 1.63 2.13 2.00 2.13 2.13 2.13 2.50 2.63 2.13 2.13 2.88 2.75 3.00 3.00 3.29 2.71 3.00 2.71 3.14 3.14 3.14 2.86 3.00 3.00 3.57 SEE countries 3 3 2 3 3 3 3 3 3 3 3 3 2 Turkey 3 3 3 3 3 4 3 4 3 3 3 4 3 Russia 3.5 3.80 3.50 3.8 4.00 3.80 4.00 4.00 3.80 3.50 4.00 3.50 3.80 Bel,Ukr,Kaz,Trk 3.30 3.80 3.4 3.80 3.50 3.6 3.9 3.80 3.6 3.8 3.6 4.00 4.00 ETC/EEC 2.96 3.04 3.21 2.93 3.25 3.11 3.18 3.39 3.32 3.11 3.21 3.43 3.54 EBRD region Legend: 1 = negligible challenge 2= small challenge 3 = medium challenge 4 = large challenge Large challenges remain almost everywhere in the EEC/ETC countries • ETC mostly large challenges (as other CIS countries) • CEB: relatively small gaps, but important areas with medium gaps (sustainable energy, transport, financial institutions) • SEE in between