EBRD sees mixed outlook for region’s economies in 2015-16

By bne IntelliNews May 14, 2015

bne IntelliNews -


Overall stagnation in 2015 and meagre expansion in 2016 are the main themes of the European Bank for Reconstruction and Development’s latest “Regional Economic Prospects” report, which was released on May 14. But those predictions, which span all 35 of the countries covered by the EBRD, mask sharp regional differences. The Russian recession will continue to make life difficult in Central Asia and the Caucasus, the bank says, while the outlook for Central Europe is improving.

In Russia itself, things look bleak: a combination of low oil prices, sanctions and deep-seated structural problems mean that the economy will shrink by 4.5% in 2015, and by a further 1.8% the following year. Nevertheless, the bank says, Russia has significant reserves to mitigate the recession, and the pressure on the ruble has subsided as oil prices have slowly increased.

The situation is even more dramatic in Ukraine, where the economy is predicted to shrink by 7.5% this year – a worse outlook than in January. Economic disruptions in the conflict-ridden Donbas region, the country’s industrial heartland, are one problem. Currency depreciation, tight economic policies, energy tariff increases and credit contraction are others. However, if the security situation does not deteriorate – and so far the risks have been contained – the bank reckons that Ukraine will grow 3% in 2016. 

The knock-on effects on Russia’s neighbours are proving to be deeper than previously anticipated, because of a combination of reduced demand for exports and falling remittances. One effect has been sharp currency depreciations in Belarus, Georgia and Moldova. The economy in Belarus will contract by 2.5% this year, and stagnate in 2016. Armenia’s prospects – a 1.5% contraction in 2015, and 1% growth the year after – are only slightly better. Although Georgia’s prospects are brighter, the predicted 2015 growth rate of 2.3% is still lower than the 4.2% forecast in January.

In Central Asia, the bank foresees a growth rate of 3.7% in 2015, which is slightly lower than previous estimates. But that hides significant variations. Kazakhstan, which has been most affected by the oil price collapse, will only grow by 1.5% in 2015 (compared with 4.3% last year). Tajikistan, Uzbekistan and the Kyrgyz Republic have been hard hit by what the bank calls the “alarming rate” of decline in remittances from Russia. The return of hundreds of thousands of migrant workers provides an additional economic challenge, and stretches those countries resources in terms of health care and social welfare. Lower prices for commodities will also dampen growth in Turkmenistan.

But if that is the bad news, there is some good news for Central Europe, where the EBRD expects average growth to reach almost 3% in 2015. One major reason is the European Central Bank’s monetary easing programme, which was announced in late January. Another reason is the strengthening of the dollar, as lower interest rates and weakened currencies should boost the region’s competitiveness. As a result, the EBRD has upgraded its growth predictions for Slovenia, Slovak Republic and Poland, the largest economy in the region.

The report also paints a slightly brighter picture for Hungary than it did in January, with a predicted average growth rate of 2.5% over the next two years. That is less than the 3.6% growth Hungary achieved in 2014, which reflected growth in industrial output, export volumes and temporary factors such as the disbursement of EU funds. Those trends have slowed or disappeared in recent months. But the Hungarian economy is still likely to benefit from increased domestic consumption, caused by gains in employment and real wage growth, cuts in interest rates and greater central bank lending to small business.

The economy in Croatia, which endured its sixth straight year of recession in 2014, will grow by 0.5% in 2015, the report predicts, as the country benefits from reduced oil prices and greater demand from the Eurozone. A range of factors, including the lack of business-friendly reform and the EU’s demand for fiscal adjustment, means that the situation is unlikely to change in 2016.

Turkey’s export-oriented economy has benefited from lower oil prices, but it is vulnerable to continuing weaknesses in the Eurozone, geopolitical tensions in the Middle East and recession in Russia. On the one hand, quantitative easing in the Eurozone is likely to squeeze Turkey’s competitiveness. On the other, any tightening of monetary policy in the US will increase its borrowing costs and vulnerability to capital outflows. The combination may exacerbate currency volatility. Growth in Turkey is likely to remain unchanged at 3% in 2015 and 2016, which is significantly below the country’s long-term potential.

All predictions rely on assumptions that could prove false. If Greece fails to reach an agreement with its creditors, reduced consumer and investor confidence in the Eurozone would result in capital outflows and weaker export demand. If the US’ tightened monetary policies have a larger impact than is currently expected, Turkey would not be the only country hit by larger capital outflows. And an escalation of the conflict in eastern Ukraine would have major economic consequences for the whole region. The situation is not as risky as it was, according to the EBRD, but problems still abound. 


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