Transcript

Transcript of a press briefing by Masood Ahmed, Director of the IMF Middle East and Central Asia Department

October 3, 2009

MS. NARDIN: Good afternoon, everybody and thank you so much for being with us for this briefing about the economic outlook for the Caucasus and Central Asia with Mr. Masood Ahmed, the Director of our Middle Eastern Central Asia Department Mr. Ahmed will now give a few remarks and then we will open it up for questions.

MR. AHMED: Thank you very much, Simonetta, and thank you all for coming to this press briefing. Let me just start off by saying that this group of countries, Caucasus and Central Asia, has been severely affected by the global crisis. And in the aggregate for that group of countries, their growth has dropped from over 6.5 percent last year to 1.5 percent this year. Within that, there are some big differences across countries, and there are also differences in terms of their prospects for next year, but I think the broad distinction is that the energy exporters in the Region have done reasonably well and the energy importing countries have been particularly badly hit.

The second message is that these countries have responded to the impact of the crisis through countercyclical policy. Those that have built up reserves themselves have been able to use those reserves for fiscal spending and monetary loosening, and those that did not have the resources have been helped in a large measure by international donor agencies and also by the IMF, and that has helped to moderate the effect of the crisis on them.

And the final message, is that, in all of these countries, one impact of the crisis has been on the financial sector, and in many cases financial sectors were stressed by the consequence of the crisis. You can begin to see this in some deterioration in the level of problem loans in their portfolios, but overall the financial sectors in these countries remain quite strong.

Let me now just say a little bit about the differences across. If you all look at the table attached to the press release you will see very clearly how the impact has differed across different countries. If you look at the energy exporters there, what you can see is that Azerbaijan, Turkmenistan, Uzbekistan, have all managed to weather the impact reasonably well. They are projected to grow by between 4 and 8 percent this year, despite a severe drop in exports. And as I said, in all of these cases, this has been made possible because they had ample public savings which they use to counter effect the consequence of the global crisis.

The exception is Kazakhstan. Kazakhstan, which has in fact had a very significant and substantial anti-crisis program, is still facing virtually no growth, maybe even a small contraction of its economy this year, which is a result of a combination of being hit both by the oil crisis and by a banking crisis, which it has had and which it has been dealing with.

And looking ahead for next year, again, all of these energy exporting economies will benefit from the recovery of energy demand, and we should see again growth in the positive territory for them, as you can see in the table.

Now, when you turn to the energy importers in the Region, Armenia, Georgia, Tajikistan, and the Kyrgyz Republic, what you can see there is a much sharper impact. In particular, the biggest effect has been on Armenia where output is going to fall by about 15 percent this year and of course, when you look at it, Armenia has also had a very fast growth rate, and over the last five years, and so, taken as a whole, it is not quite as dramatic, but certainly the energy importers as a whole are being affected.

Now, one channel through which they have been affected, which is worth highlighting, is the channel of remittances. All of these energy importers depended very much on remittances, mostly from Russia, for sustaining their economies. The share of remittances in these economies was high by national standards, almost half of GDP in Tajikistan and well over a quarter in the Kyrgyz Republic. Since remittance flows from Russia have declined by around 30 percent during the year to June 2009, and many of the migrants from these Central Asian countries were working in the construction sector in Russia, which has been particularly affected by the recession in Russia, this has seen a sharp drop in remittances. And in fact, looking at the numbers, you can see a drop of anywhere between 20 and 60 percent in the remittance flows. Because remittance is a big share of the economy, obviously that has had a big impact on their output.

More than that, remittance flow dropping has a direct impact on household incomes, it has a direct impact on living standards, and many of the gains that these economies have made in terms of poverty reduction are being now halted and, in some cases, reversed because of this very sharp decline in remittances.

Now, let me just say one word about the response of the countries, and there, as I said, they have attempted to respond by loosening their fiscal response, that is an appropriate response. We in the Fund have supported it in all cases, and we recognize, as the countries have recognized, that this fiscal response, even though it is appropriate, comes at a cost, and the cost is that, in some cases, their public debt has gone up because they have had to borrow money to finance this fiscal expansion, but we think that you save for a rainy day, and it has been a rainy day for these economies, and at this time it is a good time for them to be using that.

In the countries that have not been able to finance that fiscal expansion from their own resources--and I'm talking about the poorer energy importing countries--donors have been active in helping them.

The other element of their response which has also been effective is that they have allowed their exchange rates to move alongside the impact of the depreciation of the Russian ruble and this has caused also their real exchange rates to depreciate and kept them competitive and helped in the effective response.

The point I do want to end on is that while we see a modest recovery next year in the energy importers and a somewhat stronger recovery in the energy exporters, even so, over the two-year period, 2009 and 2010, you will still see in energy countries that particularly the energy importing countries an impact in terms of a worsening of living standards and a worsening of social indicators, and therefore the challenge for these countries for next year is to try and continue with countercyclical policy if it takes longer for their neighbors, particularly Russia, to develop, and the challenge for the international community will be to provide the necessary support through continued concessional funding to those countries which cannot afford to undertake continued expansion themselves. That's if you like the broad picture for Central Asia and the Caucuses, but I would be very happy to take any questions that you have. Thank you.

QUESTION: My question would be on Turkmenistan which, according to your forecast, will be the global champion for growth in 2010. Could you elaborate on what's going on in this economy?

MR. AHMED: I think the first point is that Turkmenistan has been less affected than the others because it has limited inter-linkages with the global economy, it has substantial reserves, and it has virtually no external debt. And the external current account and the budget are expected to remain in surplus, indeed, because of the continued expansion of exports, particularly on the oil. And the macroeconomic outlook for them as a result stays favorable. So, the main driver of growth in Turkmenistan is that they are scaling up both production and exports of hydrocarbons, and that they have limited linkages which have caused no transmission of the crisis.

I just wanted to just add a point before moving on from Turkmenistan, is that I just want to clarify that the numbers for next year also assume that the difficulties that they've been having in terms of the gas exports through the pipelines this year will be resolved.

QUESTION: Just following on the same issue, I'm not quite sure how the data is collected in Turkmenistan, but is it fair to say that one can rely on the data and to say that--when they say that they had 10 percent growth last year, that's what they had, 4 percent this year is what they're likely to have, et cetera?
MR. AHMED: With all of these countries, and indeed many other countries, the data that we have captures as best as you can economies where the capacity to collect and generate consistent data that meet international standards is still developing. So, I think it is important to bear that caveat in mind, but having got that caveat in mind, in terms of the broad indicators, as an indicator of outcomes, the numbers that we have we are comfortable with in terms of saying, yes, they do represent the sort of order of magnitude.

Now, as I said, numbers get revised even in the most advanced economies, GDP numbers get revised even for last quarter in the most advanced economies, and certainly in these economies, as you collect more data, a lot of which comes in with a lag, that is going to be data that will be revised. And that's why I think it is important to recognize that there may be revisions in the data, but broadly I think the numbers for 2008 that we have here are numbers that we are comfortable with.

QUESTION: Can you say something about Georgia, which has got some very interesting figures on this chart.

MR. AHMED: I think the first point I want to make about Georgia is perhaps say a little bit about the economic developments there in this year, and perhaps prospects for next year. And when you look at the Georgian economy this year, the impact in terms of the growth compared to the other countries has been rather limited. You know, a good question is, why has the effect of the crisis been more limited on Georgia than it is on other economies? And I think perhaps there are a couple of reasons for that. The first is that it is important to remember that the slowdown started much earlier in Georgia because of the 2008 summer conflict that they had with Russia. So, even though the decline in real GDP is relatively contained in 2009, it comes in the wake of very modest growth in 2008, and that sets it apart from the other countries where there was still rapid growth in 2008.

The second point that is worth stressing is that the transmission mechanisms of the crisis have been more muted in the case of Georgia than there were in some of the other cases.

In particular, banks in Georgia were able to rollover their external debt thanks to the early capital injection from the international financial institutions, and also due to the large external support that was provided after the conflict permitted fiscal policy in Georgia to be more supportive of demand.

Now, if you look ahead in Georgia, there are some encouraging signs that the economy may be turning around. Trade revenue, tax revenues, and other activity indicators are beginning to show improvements in the third quarter of 2009, and of course the fiscal stimulus will help to jumpstart the economy, but the key issue looking ahead is that the fiscal stimulus will need to be replaced by stronger private demand, and this will require both resumption for credit growth and of FDI. And on both of these, there is still a certain amount of uncertainty and that's why, in fact, the expected recovery that we've reflected in our numbers is subdued compared to some other countries.