Correspondents look into the crystal ball for the EBRD regions and the global economy in 2016
“Prediction is very difficult, especially if it's about the future”, Niels Bohr, the Nobel laureate in Physics, once famously observed.
We have thus invited correspondents who have been following the EBRD and the regions where it invests for many years to offer their forecasts for 2016.
Gazing into the proverbial crystal ball, our colleagues offer a glimpse of the things to watch out for and to expect in the New Year. If there is agreement on one thing, it is that 2016 is not going to be an easy ride.
- What do you think will be the dominating geopolitical developments in 2016 and their impact on Eastern Europe?
The dominant geopolitical factors affecting eastern Europe in 2016 will be the same as those in the second half of 2015. The first is Russia's search for an exclusive sphere of influence in its "near abroad". The second, more indirect factor, is the turmoil in the Middle East and the waves of migrants it is sending fleeing to Europe.
The first factor will lead to tensions continuing to be elevated - above all, along what is emerging as Europe's new geopolitical fault line, between those countries that have joined the EU and Nato and former Soviet republics and satellites that have not done so and which Moscow is seeking to keep in its "sphere".
The migrant crisis, meanwhile, will continue to fuel a shift towards nationalism in some parts of society in central and east European states - many of which are more homogenous and have less experience of multiculturalism than those further west.
Resentment will linger, too, towards west European and EU leaders who are felt to have encouraged the migrant flows, and to be attempting to force eastern states to take in migrants against their will. This could exacerbate a sense of disillusionment among some citizens of former communist states that, since the global financial crisis sharply slowed the pace of their economic convergence with western Europe, EU membership has not brought them the benefits and rewards they expected.
- Do you expect a rapprochement between the West and Russia in 2016?
Little chance exists of any significant improvement in relations between the West and Russia over the next year. Unlike after the Georgian conflict of 2008, the rift that has opened over Ukraine is too deep.
Russia is looking for something the west is not prepared to grant: a zone of exclusive interest in much of the former Soviet Union. As President Vladimir Putin hinted in a TV documentary in late 2015, Moscow is looking for the EU and the US to provide formal or informal guarantees that they will not interfere in countries Russia perceives as in its political orbit and important to it national security. In practice, that means a Russian veto on joining Euro-Atlantic institutions such as Nato. Western capitals, which now treat the right of sovereign nations to choose their political direction and alliances as an article of faith, are not prepared to allow such a veto.
Any significant easing of western sanctions on Russia, too, remains unlikely. Implementing all the political elements of the Minsk peace agreement in separatist regions of eastern Ukraine - a precondition for some sanctions to be lifted - remains politically difficult for both Kiev and Moscow. Rather than being politically reintegrated into Ukraine, albeit with significant autonomy, the Donbass seems set to become another "frozen conflict" akin to Transnistria in Moldova, or Abkhazia and South Ossetia in Georgia.
- How do you assess the prospects for Ukraine in 2016?
Ukraine's number one challenge for 2016 is to preserve political unity and stability, and focus on delivering fundamental reforms and economic revival. Russia has reduced its military pressure in eastern Ukraine since September, and seems reluctant to increase that pressure again for fear of further western sanctions. That has given Ukraine's leadership some breathing space to focus on reform. So, too, has the bottoming out of the country's recession, with a tentative return to quarter-on-quarter growth in the third quarter of 2015, and macroeconomic stabilisation.
This makes Ukraine's biggest potential weakness its own political system - which may be a factor in Moscow's tactics. Omens in the final months of 2015 have not been positive. While progress has been made on technical reforms, opinion polls suggest many Ukrainians feel little has changed since anti-government protests began in late 2013 in terms of curbing endemic corruption and the influence of vested interests, and installing the rule of law. As 2015 drew to a close, that public discontent and accusations of top-level corruption were threatening the fragile stability of the pro-western coalition.
If unity can be preserved, prospects look more positive. A return to more solid growth - even if output still remains far below 2013 levels - could boost the public mood. Full implementation of the deep and comprehensive free trade agreement with the EU will provide a stimulus for further reforms, and boost Ukraine's investment attractiveness. US vice-president Joe Biden warned recently in Kiev that the country was facing perhaps a "last chance" to deliver a better future for its citizens. If Ukraine's political system can overcome its demons, that chance still exists - and is still a significant one.
- What is your expectation for growth in the Eurozone in 2016?
About 2 percent. That's a hunch, not based on any models.
- What further impact will the refugee crisis have in 2016?
Key issue will be whether Germany and other countries can successfully integrate migrants, which means schooling and job training. Germany has the capacity and an economic incentive, but politics could get in the way.
- Which country in Central and South Eastern Europe should every observer have on his/her list for 2016 (for better or worse)?
- Where do you expect the Russian economy to be in one year from now?
Unless oil prices turn down very significantly, I judge that Russia is coming to the end of recession, and should start growing in early 2016. After contracting 3-4% during 2015, I expect a 1-2% expansion in 2016. Real wages, down 9.5% in 2015, due in part to high inflation, will remain negative in 2016 but far less so - as the economy starts to recover and inflation falls sharply (not least due to base effects).
While significant rouble adjustment has allowed the Russian economy to absorb much of the impact of sanctions and lower oil prices, the currency will recover slowly. I think it will be several years before the Russian currency returns to 30 or even 40 to the dollar - not least as the Central Bank of Russia is likely to continue to cut interest rates from their current level of 11% throughout 2016. In the absence of an oil price dip, I wouldn’t rule out rates of 6-7% by the end of the year.
- How do you see Turkey developing in 2016?
The Turkish economy has slowed in recent years, growing on average by just 2.8% in 2014 and 2015. Growth is unlikely to improve much in 2016 - not least due to the sensitivity of corporate balance sheets to foreign exchange weakness, given the extent to which Turkish companies have taken on “hard currency” debts.
As such, Turkey is among the emerging markets most vulnerable to a rise in interest rates by the Federal Reserve. Turkey’s large external surplus, which reached 5.4% of GDP in 2015, could get even wider this year.
Despite Turkey’s strategic location, and relatively highly-developed physical infrastructure, the country needs to avoid counterproductive macroeconomic policies and re-ignite structural reforms - encouraging competitiveness and cutting dependence on energy imports. It remains to be seen whether the newly re-elected AKP party is willing and able to push through such changes.
- Where should investors put their money in 2016 and why?
I never give public financial advice. It strikes me, though, that many emerging markets are now heavily over-sold, trading a relatively low price/earnings ratios, while offering good dividends yields. On a Ben Graham “margin of safety” basis, it is a good time to buy such markets - provided you are capable or riding out the volatility.
I also view crude oil as having over-shot on the downside, with a price now detached from the long-term supply-demand fundamentals. In general, as QE is called into question, and investors tire of following the whim of central bankers, I suspect there will be a heightened demand going forward for “tangible assets”.
- What do you expect to be the impact of the interest rate rise by the Fed on Central and South Eastern Europe?
I think that after the hike in December the Fed will do only one more increase in 2016 – I think that will have very little impact on anything at all in Central and South Eastern Europe and that local factors and the ECB will be much bigger drivers. If I’m wrong and the Fed does two or three hikes, things could be a lot more lively. I think the underappreciated thing could be if Saudi Arabia and other Gulf states start playing with their currency pegs, which in turn impacts oil.
- What is your expectation for actions from the ECB in 2016?
On the ECB, I expect them to continue to ease policy pretty heavily starting the end of Q1
- Do you expect emerging markets to regain investors’ confidence in 2016?
I think quite a few emerging markets will rally fairly hard, but some will have a torrid time. So big divergence basically.
Robert Kertesz, London correspondent, Hungarian news agency MTI
- What is your growth expectation for Central and Eastern Europe in 2016?
I think the overall CEE region will be able to maintain an above-trend weighted average growth of around 2.9% next year, with Poland leading the pack with a growth rate well above 3%, and Hungary being the laggard, slowing to perhaps 2.2% as EU funds set to slow substantially.
- What will be the most pressing economic issues in the region in 2016?
I think the biggest risks for the region will stem from a potentially bigger and/or faster-than-expected Fed tightening and the associated market turmoil, an escalation of the VW scandal to the extent that sales drop dramatically, causing a huge drag on Hungarian and Czech growth, and a potential political crisis in Germany in the wake of the refugee crisis that would seriously dent German consumer and business confidence.
- Do you expect a Brexit or a resolution of the crisis between the UK and its EU partners in 2016?
I can't realistically see the UK leaving the EU despite the current elevated political noise.
- How do you expect Bulgaria and South Eastern Europe to perform economically in 2016?
My expectations are that Bulgaria will record economic growth of 1.7% - 2.0% as high absorption of EU funds continues to pump up domestic demand and improving growth prospects in the eurozone boost investments. Inflation is likely to remain low and debt levels will stay moderate. The banking sector remains well capitalised but the huge deficit in the energy sector continues to pose risks. The unreformed judiciary too continues to weigh on the country’s economy.
Regarding Southeast Europe, growth is likely to pick up but remain subdued at between 1.5% and 2.5% with the notable exception of Romania where the economy is likely to expand by around 4% on the back of a robust rise in private consumption and strong performance of construction and manufacturing. Non-performing loans will stay high - above 15% - in Serbia, Slovenia and Croatia. Albania, Macedonia, Montenegro, and again Croatia, will continue to suffer from high unemployment which in some of these countries exceeds 20%.
- Do you expect the refugee crisis to continue in 2016 and, if yes, what impact will it have?
A solution to the refugees problem lies almost entirely outside the countries of South Eastern Europe whose capacity to take in more refugees is very limited. It is up to the EU now to come up with a clear strategy and resolute steps. If that happens and if the EU introduces tight control over its external borders, the pressure on the countries in the region may be brought down to levels that will have only a minor impact on their economies.
- Do you express progress with the EU negotiations of neighbouring countries of the region in 2016?
The recent invitation extended to Montenegro to start talks to join NATO sent a clear political signal of the intention of the West to contain Russia’s influence, which may be echoed by the EU institutions with a small symbolic gesture. However, none of the countries in the region are likely to make a dramatic progress towards accession in the next two or three years given both their level of preparedness and the willingness of the EU to take in more members, the more so in light of the refugee problems it is faced with.
- Will 2016 be a year of recovery for the world economy or do you expect downward pressures to prevail?
It will rather be a year of recovery, given the big drop in prices for commodities which serves as a big relief for industrialised countries and energy importers like Turkey. Also emerging market countries in deep recession like Brazil and Russia should stabilise and currency depreciation will improve competitiveness. I expect the US to continue rising interest rates rather faster to an appropriate level before a new downturn could start. China, however, should further ease monetary conditions to stabilise its economy.
- Given current developments, can Germany retain its role as Europe’s economic powerhouse in 2016?
Germany’s government is increasingly jeopardising the country’s competitiveness with measures like the reduction of the retirement age to 63 years and help for refugees. Countries like Spain and lately Italy in particular have outperformed Germany in terms of reforms of labour markets and will benefit in the medium and long term.
- What impact do you expect the “Juncker Plan” to make in 2016 on investments in Europe?
Not a big impact. Investments should be driven by expected returns. If companies do not want to invest on their own, it is because they do not expect sufficient returns. In that case it is also better for the state not to pursue such projects.