EBRD sees recovery in CEE/CIS slightly slower than predicted

By bne IntelliNews November 12, 2013

bne -

Economic growth in the region of Central and Eastern European and the Commonwealth of Independent States will improve in 2014, but the recovery is likely to be weaker than expected six months ago, according to the European Bank for Reconstruction and Development's (EBRD) latest economic outlook.

The EBRD's "Regional Economic Prospects" report released on November 11 contains lower growth forecasts for both 2013 and 2014, driven in part by slower growth in Russia, as well as reasons both cyclical - reflecting continuing weak external demand - and structural - reflecting lower growth potential, limited sources of finance for investment and unfinished structural reforms.

The report shows a slight reduction in the EBRD's average growth forecast for 2013 to 2.0% from the 2.2% predicted in May, even though "growth in the eurozone has recently improved," the report says. This compares with 2.7% growth in 2012. Meanwhile, the bank's forecast for 2014 has been cut to 2.8% from May's 3.2%.

"The downward revisions to growth primarily reflect a slowdown in Russia, Eastern Europe and the Caucasus as well as in the southern and eastern Mediterranean, compared to what was expected in May," the development bank says. "The slowdown in Russia has intensified amid a subdued investment climate. While growth in Central Asia has remained strong and the economy in Turkey has performed better than expected in the first half of this year, growth in the south-eastern Mediterranean has generally weakened."

Meanwhile, the EBRD notes that cross-border deleveraging by international banking groups has continued, albeit at a slower pace than previously. And credit growth remains negative or near-zero in real terms in many countries, while non-performing loans are continuing to weigh heavily on bank balance sheets.

To boost growth, the bank urges the region's governments to press on with unfinished reforms - a subject that will be the focus of the EBRD's 2013 "Transition Report" due to be published on November 20, which will make proposals on how the region can break out of the vicious circle of economic downturn and reform stagnation.

"Potential growth will continue to be weak in the absence of reforms, low investment and high structural unemployment that is eroding skills," said EBRD Chief Economist Erik Berglof.

The regions

The Russian economy bumped along the bottom for the second quarter of this year and actually contracted in real terms, says the EBRD. The country has been hit by a combination of the continued problems in the rest of Europe outside and weak investment inside. As such, GDP growth is expected to remain subdued at around 1.3% in 2013,

The bank is pretty downbeat on the prospects for next year too, predicting growth of only 2.5%, as it doesn't expect Europe's fortunes to improve dramatically any time soon while oil prices won't offer any succour either.

Russia's medium-term outlook remains highly dependent on commodity prices, particularly oil and gas. However, there are increasing signs that growth potential has declined due to low investment and productivity in a generally weak business environment, the report said

Internally, Russian business is suffering an unhealthy mix of low investment, while the concurrent historically low unemployment is continuing to drive real wages up by about 10% a year - ahead of the current 6.3% rate of inflation. The upshot is companies are slowly being drained of cash and their profits squeezed, which is making a private sector recovery less and less likely.

This means the ball is now firmly in the government court. The EBRD suggested that despite the government's preference for austerity, it may be persuaded to loosen the pubic purse strings to finance selected infrastructure projects in the run-up to the 2018 World Cup that is being held in Russia.

As has gradually become clear over the last couple of months, the economies of Central Europe are pushing to lead the recovery in CEE. That's thanks to their strong links to the Eurozone, as well relatively conservative fiscal policy that has kept a cap on deficits and debt in most countries. Overall, the EBRD sees Central Europe and the Baltics growing at 0.9% in 2013, before recovering to 1.9% next year.

In Southeast Europe, the EBRD says all the countries are expected to record positive growth in 2014, but the recovery is still modest. It sees on average 1.6% growth this year and 2.2% next year as the region is benefits from the positive signs in the Eurozone.

The EBRD cut its 2014 growth forecasts for Turkey amid warnings about large macroeconomic imbalances as the current account deficit remains above 6% of GDP, leaving the country vulnerable to sudden shifts in global market sentiment. It now sees the economy growing 3.7% this year before moderating slightly to 3.6% in 2014. In its May forecast, the EBRD saw GDP growth of 4% for 2014.

The EBRD reported strong growth across almost the entire Central Asia and Caucasus region, with the launch of new natural resources projects in Kazakhstan, Mongolia and Turkmenistan boosting the economies of all three countries.

For the "Central Asia" region, which is the five Central Asian republics

plus Mongolia, the forecast is for 6.7% growth in 2013 and 6.5% in 2014. The Caucasus is included in the "Eastern Europe and the Caucasus" region

along with Belarus, Ukraine and Moldova. That region's forecast is 1% for

2013 and 2% for 2014.

The EBRD increased its 2013 forecast for Kazakhstan's economic growth after an increase in oil production and continuing high levels of investment. The EBRD expects Kazakhstan's economy to grow by 5.6% in 2013 - up from an earlier forecast of 4.9% - and 5.5% in 2014. However, the bank warns of weakness in Kazakhstan's banking sector, where levels of non-performing loans remain high.

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