Europe @ Risk Report 2008 (pdf document) free file download at fliiby.com

"COMMITTED TO IMPROVING THE STATE OF THE WORLD Europe@Risk A Global Risk Network Briefing All the figures are prepared by PricewaterhouseCoopers for the Global Risk Network of the World Economic Forum. © 2008 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is as separate and independent legal entity. This work was prepared by the Global Risk Network of the World Economic Forum. The views expressed in this publication do not necessarily reflect the views of the World Economic Forum. World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: contact@weforum.org www.weforum.org © 2008 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF: 101008 Contents Foreword 4 Executive Summary: Economic Slowdown 6 Executive Summary: Energy Security 8 Executive Summary: Demographic Shifts 10 Executive Summary: The Skills Gap 12 Acknowledgements 14 Resources 14 3 Foreword This report examines the global risks most pertinent to Europe, Russia, Eastern Europe, Turkey and Central Asia relating to four areas: economic slowdown, energy security, demographic shifts and education. Based on the framework developed by the Global Risk Network of the World Economic Forum, which tracks a selected set of risks over a 10-year time horizon, the report considers how interrelated these areas are and how the related risks might impact all or parts of the region. As the report was being prepared, the financial crisis that began with the collapse of the sub-prime mortgage market in the US in 2007 had reached a critical point. Figures for Western Europe show that it is officially in recession and US figures indicate that it is also heading for one. While at this point there appears to be consensus that the effects of the crisis will be felt globally, there is still a very high level of uncertainty about the full extent, duration and longer term consequences of this crisis for both developed and emerging economies. Though the last few decades have all seen financial crises in different regions and sectors, the acceleration of global integration over the past 10 years lends this crisis a new dimension. Europe, Russia, Turkey and Central Asia might all experience it differently but none of these countries will be able to isolate themselves from it. This economic situation puts a number of the region’s challenges in new light. Slower or no growth, combined with tighter credit conditions, will impact consumer, corporate and government spending. The mitigation of many of the risks considered in this report requires considerable investment over the long term, be it in infrastructure, education or alternative energy. What are Global Risks? To constitute a global risk, an issue must have global scope, cross-industry impact; there must be uncertainty as to how the risk will manifest itself (with regard to the likelihood of occurrence and severity of impact). Our definition: non-business risks that affect business (i.e. not operational or project risk) • They can be strategic, exogenous and systemic • They are highly interdependent (i.e. do not themselves manifest in isolation) • They are characterized by uncertainty, sharp discontinuities, non-linearity (power law distributions) and lack of proportionality • They cannot be predicted (but can be managed) Though the current economic situation clearly requires attention in the immediate term, the World Economic Forum’s work on risk takes a 10-year time frame and thus this report considers risks to the region over that period and beyond. The issue summaries consider not only the risk implications but also the potential that government and business have to mitigate those risks and/or even generate opportunities on them. All of the countries discussed face a number of individual challenges but they also face a set of common challenges: the need to create and sustain growth; to reform fiscal regimes in light of changing demographics; to develop a more holistic approach to energy strategy; and to promote innovation and job creation by addressing skills gaps through existing and new educational models. Matrix of Impacts of Global Risk Events on the Oil and Gas Industry Economic cost Reduction in GDP ($bn) 1 100 Long O&G supply disrupted 900 Short Short 700 Health major crises 500 Climate change China slowdown Pandemic contagious by air Blockade only - long Iran – US war Blockade only - short 300 SARS spreads US$ crisis Multiple 100 attacks -100 Terrorist attack Air single attack -300 Industry gain Oil & Gas industry cost Profit pool reduction Industry loss Note: Assessments of impact are derived from a number of different global risk scenarios developed for the oil and gas industry by Marsh & McLennan Inc. 4 About the Global Risk Network This report builds on the existing work of the Global Risk Network of the World Economic Forum in tracking risks over a 10-year time horizon as presented in the annual Global Risk report produced in collaboration with Citi, MMC, Swiss Re, Zurich Financial Services and the Wharton Risk Center. The Global Risk Network is composed of an unparalleled network of industry, risk and country experts who work with business leaders and policy-makers to: • Create a framework for assessing and prioritizing existing and emerging risks to global business over the short and long term • Explore the interconnections among different types of risk and consider the strategic implications • Alert key decision-makers to the impact these risks might have on their environment • Assist leaders in their reflection on how risks may be mitigated at the global, regional, industry and company level • Transform aspects of global risks and their mitigation into business opportunities Risks classified in the report have global scope and crossindustry impact and are characterized by uncertainty as to how the risk will manifest itself (with regard to the likelihood of occurrence and severity of impact). The Global Risk Network has identified 26 core global risks to the international community over the next 10 years. These core global risks have been assessed in terms of likelihood and severity (see Figure below). A more detailed description of the core global risks can be found in the Global Risks 2008 report, published for the World Economic Forum Annual Meeting 2008 (available at http://www.weforum.org/en/initiatives/globalrisk). The 26 Core Global Risks: Likelihood with Severity by Economic Loss 250 billion - 1 trillion more than 1 trillion Retrenchment from globalization (developed) Asset price collapse Slowing Chinese economy (6%) Oil and gas price spike Pandemic Infectious disease, Transnational crime CII breakdown developing world and corruption Chronic disease, developed world NatCat: NatCat: Middle East instability Heatwaves & droughts Major fall in US$ Interstate & civil wars Retrenchment from globalization (emerging) Food insecurity Fiscal crises in advanced economies Extreme climate change related weather Emergence of NatCat: Failed & failing states nanotechnology risks Extreme inland International terrorism flooding Loss of freshwater Cyclone Earthquake Liability regimes Collapse of NPT Severity (in US$) 2-10 billion 10-50 billion 50-250 billion below 1% 1-5% 5-10% 10-20% above 20% Likelihood Source: World Economic Forum Global Risks 2008 5 Europe@Risk COMMITTED TO IMPROVING THE STATE OF THE WORLD Executive Summary: Economic Slowdown What are the effects of the global financial crisis on the region’s real economy? What institutional adjustments are required to tackle the current economic slowdown? Risk Global financial crisis: Confidence in the financial sector and among lenders has declined to record lows. This lack of confidence and the high level of uncertainty are resulting in liquidity problems for banks and financial institutions, and very tight credit conditions for commercial and private borrowers. The financial crisis is already affecting the real economy at a high level and the risk of a deep and prolonged recession is growing. Important Trends sustainable economic growth, job creation and prosperity. Inflation: 2008 inflation rates for Central Asia and the Caucasus are expected to reach 10%; in Eastern Europe, 9.7% and Western Europe, 3.4%, placing additional pressure on growth and employment. The outlook for 2009 is that inflation is expected to fall slightly across most economies. Jean-Claude Trichet, President, European Central Bank The role of central banks: Maintaining inflation and ensuring long-term fiscal sustainability – including healthcare and pension schemes – is a major challenge for all monetary institutions. In addition, the financial crisis has forced them to move to restore confidence by taking steps to prevent further bank failures. Though the ECB and EU are attempting to develop a coordinated response to the financial crisis, individual governments have taken their own measures rendering this more difficult. Financial system: Several leading European banks have had to be rescued, suggesting that the European financial system is equally exposed to this crisis. At the time of going to press, uncertainty runs very high as to the exact number of financial institutions that might still be affected. Bank financing has tightened to a record level and strong measures will be required to restore confidence. Sharp and rapid declines in equity prices have increased the cost of raising capital. The cost of borrowing has increased in emerging markets and there has been some retrenchment from them as investors lose confidence and need to sell assets to raise cash. High economic uncertainty: Growth and uncertainty of unemployment, potential volatility of major currencies, market instability and bank losses all contribute to protectionist pressures and set an environment of extreme uncertainty. Implications EU15: The direct trade effect of a sharp slowdown abroad is likely to have a severe impact because of the high trade openness of the region. Risk repricing and portfolio rebalancing affect risk-taking attitudes and are already having a negative impact on investment in the region. Russia: Russia’s economy is robust. With 7.5% year-on-year growth in the second quarter of 2008 and growth of 5.5% projected for 2009, Russia has the third-largest foreign exchange reserves globally (US$ 500 billion), low international debt, a huge resource-fuelled trade surplus and nearly US$ 200 billion in sovereign wealth funds. But stock market indices accumulate significant losses and an estimated US$15 billion of foreign capital left the country over the past six months. Emerging Europe: Structural reforms have boosted growth and enhanced productivity across the region. Growth rates have been high in recent years and an adjustment is expected in the coming periods. Current account deficits and high levels of external debt raise the risks of a hard landing. High dependence on foreign capital amplifies external vulnerability. 6 “ Growth Outlook: The latest figures from the IMF Global Outlook (October 2008) show a serious global downturn with projections for growth in European economies being particularly affected: e.g. Germany, no growth; UK -0.1%; France, 0.2%; Spain, -0.2). On the other hand GDP growth projections for Russia, Turkey, Central and Eastern Europe, and the CIS are still positive, with 5.5%, 3.5%, 3.4% and 5.7% respectively. “ The delivery of price stability over the medium term is the best contribution that monetary policy can make to European Economic Growth Europe’s Contribution to Global Growth Wider Europe's share of global GDP growth is forecast to fall more than 10 percentage points from 2007 to 2009 30% EU15 continues to grow more slowly than other regions of the continent 10% Baltics 8 South-East Europe Europe's share of global GDP growth CIS 30.5% 25.2% 20 22.1% Real GDP growth 6 Central Europe 4 EU15 2 10 0 0 -2 2000 2001 2002 2003 2004 2005 2006 2007 Note: Wider Europe defined to include 16 countries in Western Europe, 10 countries in Central and Eastern Europe, and Turkey 2007 2008F 2009F Source: IMF Source: PwC forecasts Central Asia and the Caucasus: The transitional recession, the emergence of inequality and poverty affect regional living standards. Unemployment is an important element and affects the growth sustainability and welfare in many countries. The growth of the informal economy and migration has important implications for labour markets and the welfare state. Regional consumption and investment patterns: Increased borrowing costs, the financial sector crisis and persistent above-target inflation across the region affect investment and consumption decisions and lower total consumer spending. The credit crunch, financial market losses and uncertainty create even further tensions on market confidence, generating more fear. Mitigation Financial system: Strong policies will be necessary to restore confidence and improve transparency are required. Further reforms to guarantee financial system stability need to be put in place to enhance supervisory oversight and risk management as well as monitoring leveraged positions. Enabling trade: Sweden, Norway, Denmark, Finland and Germany are the top five European countries on the World Economic Forum’s Enabling Trade Index. The Kyrgyz Republic, Uzbekistan, Tajikistan and the Russian Federation are the countries of the region that appear at the bottom of the ranking. Further institutional reforms and infrastructure investment are required to promote trade and, hence, growth. “ Today, the centre of our attention will be global changes in the financial systems, on commodities and food markets. And, likewise, economic relations between various countries, including relations between the former leaders of international development, which are showing losses, and new players that are ensuring growing rates of economic growth. Dmitry Medvedev, President of the Russian Federation Emerging Europe: Fiscal consolidation and further structural reforms will contribute to ease convergence. Increasing resources in tradable sectors will help reduce trade imbalances and increase the resilience of the region. Central Asia and Caucasus: The region is still facing the challenges of sustained stabilization and making further progress in privatization, liberalization and preservation of basic safety nets. Further improvements on infrastructure and basic social security systems are crucial. Examples Turkey, after a succession of boom and bust cycles, implemented fiscal, monetary and institutional reforms enabling the country to reach average growth of almost 7% during the period 2002-2007. The private sector has grown successfully attracting greater levels of foreign direct investment: from US$ 1.1 billion in 1995 to US$ 21.7 billion in 2007. The stock value of foreign direct investment currently stands at about US$ 85 billion. Poland is the biggest economy of Eastern Europe and growth in the first quarter of 2008 has been at 6.1%. Overall growth for 2008 is expected to be around 3.9%, with a slight drop to 3.5% forecast for 2009. Unemployment rates have dropped dramatically (from 20% in 2003 to 10% in 2008). Eastern Europe and Central Asia are the top reformers in the World Bank’s Doing Business 2009 report for the fifth year in a row, showing that they are progressing with necessary reforms to improve their competitiveness. . “ 7 Europe@Risk COMMITTED TOTO COMMITTED IMPROVING THE STATE IMPROVING THE STATE OFOF THE WORLD THE WORLD Executive Summary: Energy Security How can the region manage the energy security challenges as demand grows? How can energy sustainability be improved in the region? Risk Energy access and distribution: Potential supply disruptions in the region could trigger tensions and even conflict. The energy supply chain is vulnerable. Combined with demand side pressures, incidents in one area might have knock-on effects on the wider region. Evolution of commodity prices: Prices in 2008 were nearly double the 2003 prices in real terms. Oil prices reached the maximum level at US$ 147 per barrel in mid-July 2008. Energy prices in Europe rose by 70% year-on-year by February 2008, building up inflationary pressures and affecting household expenditure and private sector budgets. Though overall commodity prices have fallen recently, volatility remains high reflecting the level of uncertainty about the effects of a recession or prolonged downturn on demand and the potential for political risks creating supply side problems. Important Trends Energy consumption: Global energy consumption is projected to increase by 50% from 2005 to 2030. Non-OECD countries total energy demand is expected to increase 85% by 2030, compared with an increase of 19% in the OECD countries, adding more pressure to existing energy sources. Fossil fuels are expected to continue supplying much of the energy consumed worldwide in the short run; its supply management is crucial for the geopolitical stability of the region. In the global context, the EU27 currently account for 16% of global energy demand. In 2007, Russia was the world’s largest oil producer, at 12.4% of global oil production, though it is only the second largest exporter. For gas, it is both the world’s biggest producer and exporter, with 21.5% of global production. Energy supply prospects: The region has a dominant energy producer in Russia, which in 2007was the world’s largest oil producer, at 12.4% of global oil production, though it is only the second largest exporter. For gas, it is both the world’s biggest producer and exporter, with 21.5% of global production. The EU energy policy is to encourage investment in alternative energy sources. High energy prices have made certain alternatives more feasible on a cost-benefit basis. Investment in renewable sources of energy – wind and solar – is on the increase but remains low relative to investment in exploration, coal and nuclear. Biofuels, including ethanol and biodiesel, might become a more important part of the liquid supply mix, though there is a challenging debate on the subsidies received by this sector and the trade-off between land uses for biofuels vs food crops. Reliance on imports: Western Europe pays great attention to the security and geopolitical situation in the Caucasian and Central Asian states due to the oil and gas reserves in the region and the influence on the supply of energy in the short run. There is increasing energy import dependence in many countries; by 2030, 90% of oil and 80% of gas consumption in Europe is expected to be imported. Central Asia and the Caucasus: Oil and gas reserves have a vital geostrategic and economic importance for the whole region. These energy resources are essential to ensure future revenues and generate development and wealth in these countries, and are key in supplying energy to the European Union. Implications Ripple effect of commodity prices: Energy price increases have an impact on production and transportation costs of other commodities such as food. Ultimately, higher food prices have the greatest impact on the poorer segments of society. Though the rising middle classes in emerging countries are increasing their spending power, discretionary spend is still low and food generally represents a relatively high percentage of their consumption basket. Energy access and distribution: Access to Eurasian energy to reduce European dependency on Middle East oil and Russian gas is at the cen..."

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