IMF predicts slower rebound for CEE than other emerging markets

By bne IntelliNews October 1, 2009

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The International Monetary Fund said in its twice-yearly World Economic Outlook that the combined GDP of emerging European economies - with the addition of Turkey - will grow by 1.8% in 2010, having contracted by 5.25% in 2009. However, the availability of foreign investment to the region will remain below pre-crisis levels for some time, meaning it will grow more slowly than other emerging markets.

Emerging Europe was hit particularly hard by the drop in capital inflows, which led to major contractions in the Baltic economies, Bulgaria and Romania, although exchange rates acted as a shock absorber in economies with flexible regimes, it said. However, "in recent months, the pace of contraction has slowed dramatically in much of the region, with risk appetite returning, exports accelerating, and the inventory drawdown moderating, although private credit remains sluggish and unemployment is on the rise."

The new forecast recovery is stronger than in the previous economic outlook report in April, when 2010 growth was forecast at 0.8%. But the estimated contraction for 2009 is deeper, with the April forecast having been a drop of 3.7%.

The report, released October 1, also says the recovery will be uneven. "Some emerging European economies – notably the Baltics – will continue to contract in 2010, but sizable output gains are expected elsewhere, notably in Poland and Turkey."

Energy key in the CIS

The report says that for the Commonwealth of Independent States the economic fallout of the global crisis has been intense and is weighing heavily on the region's economic outlook. The IMF raised its 2010 growth forecast for the CIS to 2.1% next year, having in April forecast it would grow by 1.2%. Once again, however, it expects the contraction in 2009 to be deeper than it thought likely in April.

There is a divergence between those that import energy and those that export energy, the report notes. "A sharp contraction in Russia, on top of the effects of the global recession and financial crisis, has led to painful adjustments in lower-income net energy importers in the region. With many of these economies still dependent on Russia for remittances and export earnings, the crisis depressed domestic demand, upended credit booms, and in some cases shut down access to foreign capital markets," it said.

The IMF says the path toward recovery will be difficult for most CIS economies given that Russia is projected to experience a deep recession in 2009, with GDP contracting by 7.5%, followed by only a tentative recovery in 2010, helped by expansionary fiscal policy, improving commodity prices, and recovery in Europe and the US. "Without this regional growth locomotive, the lower-income, non-oil-exporting CIS are expected to experience steep growth declines in 2009 followed in 2010 by a modest recovery – growth of less than 3%.

For Ukraine, plagued by political uncertainty and sluggish demand for its exports like steel, the recession is expected to be very deep. "GDP is forecast to be -14% in 2009.

On the other hand, for energy-exporting economies, the growth outlook is more benign. "Most of the energy-exporting countries are weathering the financial turmoil and the drop in energy prices comparatively well, because they could draw on large policy buffers and are less dependent on developments in Russia."

Azerbaijan and Uzbekistan are projected to experience only a moderate slowdown in 2009, followed by unchanged growth in 2010, as energy prices recover and fiscal expansions support domestic demand. An exception is Kazakhstan, which is projected to contract by 2% this year as its economy works through adjustment in the financial sector. A projected modest recovery in 2010 is mainly the result of a $10 billion anticrisis plan aimed at recapitalizing banks and supporting economic recovery.

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