EBRD: Economic Risks Continue

EBRD: Economic Risks Continue

The EBRD’s latest “Regional Economic Prospects Report” says risks to the outlook are continuing to mount.  “An escalation of the euro zone crisis would pose serious risks to growth and recovery across the region, especially in south-eastern Europe and the new EU members,” says Erik Berglof, the EBRD’s Chief Economist.  The warning comes in a publication of July 22, on the EBRD bank’s latest growth forecasts for its 29-country region of operation. Any escalation of the euro zone crisis would pose serious risks to the economic recovery in Eastern Europe and could push parts of the region into a new downturn, the European Bank for Reconstruction and Development (EBRD) has warned.

The EBRD has revised up slightly its growth forecasts for emerging Europe for 2011, but the Bank’s latest economic outlook warns of mounting risks from the euro zone that could jeopardize economic prospects for the region. Against the backdrop of a continuing recovery from the global economic crisis, the EBRD’s economists are predicting growth of 4.8 per cent across the 29-country region in 2011, up from 4.6 per cent seen in May. The 2012 forecast is unchanged at 4.4 per cent. EBRD said among its countries of operation, the economies of southeastern Europe have experienced the weakest recovery and are likely to expand by just 2.3 percent this year. By contrast, the bank expects the economies of central Asia will grow by 7.3 percent and the economies of central Europe and the Baltics to grow by 3.5 percent.

The prediction ‘assumes a relatively benign external environment, in which risks from the euro zone are contained,’ the EBRD said. [However,] an unresolved sovereign crisis would halt investment and capital inflows to eastern Europe and losses booked by western banks, owners of more than 70 percent of regional lenders, would prompt them to curb loans, the EBRD warned.

The EBRD also said that countries in southeastern Europe are especially vulnerable to an intensification of the crisis, partly because of the role played by Greek banks in providing credit. “Much of the region’s banks are owned by Greek banks,” the bank said. “In the case of an escalation of the crisis, some of these may require financial support and may struggle to maintain their lending to local economies.

The European Bank for Reconstruction and Development (EBRD) has revised upwards its forecasts for economic growth for 2011 in the European emerging markets, the bank said.

However, according to the EBRD, increasing risks in the euro area could threaten the prospects for economic development in the region.

Recovery in the EBRD region continues with GDP growth expected to reach 4.8 per cent in 2011 before slightly slowing to 4.4 per cent in 2012. This assumes a relatively benign external environment in which risks from the Eurozone are contained, EBRD’s recent report reads.

An escalation of the Eurozone crisis would pose serious risks to growth and recovery across the region, especially in south-eastern Europe and the new EU members.

The CIS countries are likely to be affected less by the Eurozone debt market turmoil. Energy exporters in the CIS would be hurt by Eurozone stagnation that could stem from the turmoil through its impact on commodity markets. The stagnation could result in lower demand for commodities including oil and gas, reducing their currently high prices.

 

Capital inflows into the region were stronger in the first quarter of 2011 than in most of 2010 thanks to a sustained increase of portfolio inflows since the last quarter of 2010. Nevertheless, FDI still remains the main form of capital inflows . Higher frequency data, however, suggest a slowdown in the second quarter .While bond fund net inflows into the region remained around zero in April and May, equity funds showed a sharp outflow in May after inflows in the first four months of 2011.

Economic growth in the region has been accompanied by rising inflation particularly in Eastern Europe, the Caucasus, and Central Asia, fuelled both by external factors in the form of higher food and commodity prices, and by increasing core inflation as domestic demand strengthen

Credit growth is recovering especially in Albania, Russia, Turkey, Poland, Serbia and eastern European and the Caucasus countries. But it remains weak or negative in Ukraine, the Baltics, Hungary, Slovenia and Romania where the economic recovery has proceeded more haltingly or where pre-crisis credit booms were strongest. Excessive regulation in the form of high bank levies may have also played a role in some cases.

Looking to specific risks, the EBRD report points to possible financial turmoil as a contagion risk for countries with financial systems that are deeply integrated with the euro zone.

If turmoil in sovereign debt markets – and closely linked financial institutions – disrupts financial markets more broadly, then the recovery in central and south eastern Europe would stall, the report warns.

The report also says that rising commodity prices are presenting a challenge to policy makers, especially in Eastern Europe, Russia and Central Asia. Pressures from nominal wage growth may feed into core inflation and, conversely, rising inflation may increase political pressures for wage increases.

The  region’s deep integration in trade networks and commodity markets means also that it remains exposed to any broad-based downturn in the global economy stemming for example from monetary tightening in the euro zone and the United States or a downturn in rapidly growing emerging market countries in other regions.

In south eastern Europe and Turkey the picture is mixed, with the Turkish economy continuing to boom and most of south eastern Europe continuing to lag. But economic prospects have improved in the two EU members, Romania and Bulgaria.

In eastern European and the Caucasus, economies are benefiting from stronger external demand, commodity price increases and a revival of remittance flows. While Ukraine’s economy has continued to recover from its deep crisis, critical fiscal and energy sector reforms are facing political resistance.

Ukraine’s economy is seen growing by 4.5 percent this year and by the same amount in 2012.

Russia and Kazakhstan have also been recovering on the back of higher oil prices, major fiscal stimulus packages and support for the banking sector.

With the Russian economy picking up again, growth is seen at 4.6 percent this year and slightly higher in 2012, after 4 percent in 2010. The banking sector has become healthier and credit growth in Russia has gradually resumed. But rapid increase in government social spending resulting in sustained fiscal deficits could make the economy more vulnerable to swings in commodity prices.

Kazakh growth is expected to remain at a strong 7 percent in 2011, driven mainly by a strong performance in the hydrocarbons sector. However, credit growth remains stagnant as non performing loans remain high and Kazakh banks remain largely excluded from foreign borrowing.

Source; EBRD, July, 2011

 

 

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