EBRD says emerging Europe remains under eurozone cloud

By Anthony Williams
@ebrdtony

Emerging Europe is continuing to be buffeted by the crisis in the eurozone despite improved economic fundamentals in much of the region. As a result, the EBRD is still predicting a substantial slowdown in growth in transition economies in 2012.

In its latest economic outlook for the transition region, which for the first time includes  four countries in the Middle East and North Africa, the EBRD is forecasting expansion of 3.1 per cent in 2012, after 4.6 per cent in 2011. The Bank’s economists see only a modest pick up to 3.7 per cent for next year.

The report (676KB - PDF) says: “The euro area crisis will continue to negatively impact those economies in the transition region that are the most intertwined with those of the eurozone.” Although recent data suggests that capital outflows from the region may be levelling off, negative real credit growth and declining exports will continue to impede expansion.

As a baseline scenario, the EBRD assumes that the eurozone will be able to contain its crisis but will not avoid a mild recession.

The eurozone slowdown will affect the EBRD via both trade and financial channels and also because of a downturn in remittances in some countries.

On the one hand exports are suffering. On the other hand output in the transition region will also suffer as western banks that play a significant role in many countries in emerging Europe continue to strengthen their balances sheets, partly by reducing lending and selling off assets.

 “As European parent banks continue to deleverage, subsidiaries in the transition countries will see reduced cross-border funding and therefore extend less credit,” the report says. These bank-related capital outflows are expected to continue in the coming months, notwithstanding signs that equity and bond inflows may have returned to the region in the first quarter of this year.

The EBRD report predicts that growth in central Europe and the Baltic states will only grow by 1.6 per cent this year, slightly improving to 2.3 per cent in 2013. In addition to Slovenia, which already contracted in 2011, Croatia and Hungary are expected to see negative growth, as local factors exacerbate the impact of the eurozone crisis.

South-eastern Europe is expected to grow at an even lower rate of 1.0 per cent in 2012, picking up to about 2.4 per cent a year later. While no SEE country is expected to re-enter recession, most of them will see anaemic growth, reflecting a big drop in investment in recent years and weak levels of confidence, in part as a reflection of their links to crisis-hit Greece. 

Ukraine, whose economy is somewhat integrated with both the eurozone and Russia, will also see a slowdown in growth of about 2.5 per cent this year.

Commodity exporters further east in the transition region will continue to be less affected by the eurozone crisis as commodity prices, and oil prices in particular, are expected to remain high. Economic expansion in commodity-exporting countries in Central Asia will remain the fastest in the transition region.

In Russia, an already robust economy benefited from high oil prices in the first quarter of 2012. Growth is projected to reach 4.2 per cent in 2012 and 4.3 per cent in 2013, about in line with last year’s growth.

Turkey's economy continued to grow buoyantly throughout the end of last year, reaching an overall growth rate of 8.5 per cent in 2011, but is headed towards significant slowdown this year brought about by a drop in domestic demand and the worsening economic conditions of the eurozone.

The four countries in the southern and eastern Mediterranean region, where the EBRD expects to start investments this year, continue to face serious macroeconomic challenges and heightened uncertainty, especially in light of the current social and political changes. Fiscal and external current account deficits have significantly widened in the SEMED countries in 2011 and their external financial needs remain significant in 2012-13.

 The economies in Egypt, Tunisia and Jordan have been hit to different degrees by declining tourism, foreign direct investment and trade. With risk perceptions high, many investors have for now adopted a wait-and-see approach to much of the region. At the same time, Morocco saw increases in tourism and agricultural output, delivering the highest growth rate of 4.8 per cent in the subregion, although a decline in agriculture in early 2012 is translating into a slowdown in growth this year.

The report also notes that while the growth performance of a typical transition country in 2011 was in line with other emerging market regions and overall macroeconomic fundamentals improved, their economies remain more vulnerable to external shocks. Indeed, because of the uncertainties facing the eurozone, 2012 and 2013 growth may well turn out lower than currently projected. The risk that emerging Europe as a whole will re-enter recession within the next 12 months is viewed as high, according to the report.