Romania leads SEE region in GDP growth, EBRD says

By bne IntelliNews November 4, 2016

The EBRD raised its 2016 and 2017 forecasts for GDP growth in SEE in its latest Regional Economic Prospects report released on November 3. SEE’s average growth is now on a par with CEE, and Romania is the standout in the region in 2017 and 2017, with its growth even outstripping the small Western Balkan economies. 

In the first half of 2016, average growth across the region rose to 2.3%, up from just 1.4% in 2014, with every country in the region recording growth except Greece. 

The regional average is set to accelerate further to 2.8% in 2016 and 3% in 2017, supported by “significantly improved prospects” in Serbia and robust growth in Romania.

Driven mainly by domestic demand, GDP growth figures for Romania are well above the regional average at 5.2% in H1 2016. This will slow somewhat to 4.8% for the full year 2016 and 3.7% in 2017, but still remains the fastest in the region. 

“The contribution of private consumption to growth was higher than expected, on the back of improved income prospects driven by low inflation and wage hikes, as well as fiscal easing,” the EBRD says. “Consumption will be pushed further up by the wage hike for the entire health sector as of August 2016 and cut in employees’ social security contribution by 2017.”

The EBRD also notes the contribution made by private investments, given the historically low cost of funding and improved industrial confidence, while it forecasts that government spending will remain subdued. 

Other observers, including both the IMF and the Romanian central bank, have warned about the potential risks of Romania’s expansionary spending. 

Strong domestic demand is also the main growth driver in Bulgaria, spurred on by the 10.5% increase in the minimum wage as of January. This has put Bulgaria on track for growth of 2.8% in 2016 and in 2017. 

The Serbian economy has its healthy growth - forecast at 2.5% in 2016 and 2.7% in 2017 - driven mainly by private investment and the recovery of consumption, which together are expected to offset a less than stellar export performance. 

The EBRD points to some uncertainty in the forecast for Serbia, given that the medium-term prospects will depend heavily on the pace of reform as set out in Serbia’s stand-by arrangement with the IMF. While Serbia had a generally favourable sixth review of the programme this month, the fund has warned about Belgrade’s lack of progress on public enterprise reform. Weak external demand, especially for automobiles, would be problematic for Serbia, whose top exporter is the local arm of Fiat Chrysler Automobiles. 

On the other hand, Serbia could also see a larger than expected upside if the ambitious investment plans announced for the Zelezara Smederevo steel mill by its new Chinese owner come to fruition.

Performance is mixed across the Western Balkans in 2016, with growth rates ranging from 1.5% in Moldova - which has been beset by political turmoil and a major banking sector crisis - up to 4% in Montenegro, where growth has been driven by strong FDI inflows, better tourism numbers and progress on theChinese-financed Bar-Boljare highway. 

Montenegro is expected to continue as one of the fastest growing economies in the region in 2017, despite concerns about the rise in public debt, which the EBRD warns “may necessitate painful austerity measures elsewhere.” Both Albania and Kosovo are expected to match Montenegro’s 2017 forecast of 3.5% growth, helped by the construction of the Trans Adriatic Pipeline (TAP) in Albania, and strong consumption and investment in Kosovo. 

At the other end of the scale, Croatia will grow by a modest 2.0% in 2017. According to the EBRD, this reflects "a lower contribution of net exports as consumption and investments continue to recover, and continuing fiscal adjustment to put the public debt on a sustainable path. Despite some improvement in business sentiment, private investments are expected to remain weak, pointing to persistent structural weaknesses."  

However, the benefits of this growth are not reaching everyone. The focus of the EBRD’s latest transition report is on equal opportunities, and SEE has the largest variation across the EBRD’s area of operations. Bosnia & Herzegovina, Montenegro and Serbia display some of the lowest levels of inequality of opportunity, comparable to those seen in Germany. By contrast, inequality of opportunity in Bulgaria, Kosovo and Romania is estimated to be above the median for the EBRD region. 

This has a knock on impact on income; as the EBRD report points out, “there are no cases where a country with high levels of inequality of opportunity enjoys moderate or low levels of income inequality.”

The report also explores the contributions that circumstances such as gender or place of birth make to overall inequality of opportunity. Both a person’s parental background and their gender are found to be important contributing factors. 

A person’s birthplace is also important in some countries though not others. The report singles out Kosovo and Moldova, where “being born in a rural area is associated with a reduction in income of between 25 and 35 per cent".

Substantial regional gaps in the quality of local institutions were also reported in Southeast Europe, as well as Central Asia. This was an issue in Albania, Bosnia, Bulgaria, Kosovo and Romania in particular.


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