bne IntelliNews -

Growth in Southeast Europe is expected to accelerate from 1.9% in 2014 to 2.3% this year, according to a new report from the European Bank for Reconstruction and Development (EBRD).

Like Central Europe, Southeast Europe will outperform other economies in the transition region, where zero growth is expected this year, improving to just 1.4% in 2016. By contrast, the EBRD has raised the regional forecast for Southeast Europe by 0.1pp from 2.2% in its previous set of forecasts in January to 2.3% in the Regional Economic Prospects report released on May 14. Growth will further increase to 2.8% in 2016.

The main factors behind the improved regional performance are the European Central Bank’s quantitative easing programme and lower commodity prices, though with domestic drivers outweighing international trends in most countries, there are wide variations in forecasts across the region,

“Growth performance in [Southeast Europe] has been mixed against an improving external environment, reflecting the importance of domestic policy factors,” the report says. Specifically, it points to the ongoing fiscal adjustment in Serbia and lower confidence in Bulgaria.

Despite the current political crisis, Macedonia will be the fastest growing economy in the region, projected to expand by 3.5% in 2015 and 3.7% in 2016. Both Montenegro and Romania are expected to grow by 3.0% this year, accelerating to 3.7% and 3.3% respectively in 2016.

Romania, the largest economy in the region was boosted by growing private consumption in 2014, even though both net exports and investment remained low. There are hopes of a revival in investment this year, as the EBRD speculates that, “Rising industrial confidence and the deprivation of inventories may lead to a rise in investments after two years of fall.” Meanwhile, interest rate cuts are expected to further stimulate consumption.

However, reflecting the importance of country-specific factors on growth, the EBRD lowered its forecasts for several other countries in the region. The 2015 forecasts for Bosnia and Herzegovina, Moldova and Serbia were all cut by 0.2pp, while Kosovo’s was lowered by 0.1pp.

This was a particularly disappointing result for Serbia, which in May had its 2015 growth forecast increased from a contraction of 0.5% to zero by the International Monetary Fund, so was hoping for similar upgrades from other international financial institutions. The EBRD has, however, kept its 2015 forecast for Serbia positive at 0.3%, noting that both Serbia and Bosnia showed considerable resilience to the severe floods in mid-2014.

“We expect a modest recovery [in Serbia]... with the successful implementation of the macroeconomic programme; further monetary easing; and improvements in the business environment,” the EBRD says. “The construction of major infrastructure projects may also speed up.”

The EBRD also warns that the downside risks for the region “remain considerable”. The chief risks are increased volatility in Greece, higher geopolitical risks connected to the situation in Russia and Ukraine, and a larger than-expected impact of tightening of monetary policy in the US in early 2016.

Also holding back growth within the region is subdued credit growth as parent banks continue reducing their exposure to both Central and Southeast Europe. “The rate at which parent banks are reducing their exposure to these regions appears to have increased again in recent months, and this reduction has not been fully offset by an expansion in the domestic deposit base,” the report says. Credit recovery is also constrained by high non-performing loan (NPL) ratios, though these have recently declined in Romania following regulatory action.