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Recovery in eastern Europe and the Caucasus affected by Russia-Ukraine crisis

By Olga Rosca

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Growth in eastern Europe and the Caucasus accelerated towards the end of 2013, but the outlook has worsened considerably in early 2014 amid tensions in Ukraine, according to the EBRD’s latest economic report (944KB - PDF) published today.

A growth pick-up in the last quarter of 2013 was in part driven by a good harvest season. At the same time, this strong growth in agriculture was not sufficient to compensate for the general slowdown in many other sectors as well as weak investment activity and low FDI inflows.

In 2014, crisis in Ukraine, substantial slowdown in Russia and rapidly increasing geopolitical risks in the region and the likelihood of negative cross-border economic and financial spill-overs will constrain economic activity further. The devaluation of the Russian rouble, Kazakh tenge, Ukrainian hryvnia and Turkish lira in the beginning of the year may affect competitiveness in the eastern Europe and the Caucasus region and impact trade volumes.

In Armenia, growth rebounded in the fourth quarter of 2013, led by agriculture, industry and financial services, while the construction sector showed some signs of stabilisation. Still, the annual pace of growth slowed down to 3.5 per cent in 2013. Political uncertainty in the country can weigh on private investor confidence and remittances growth will remain weak due to the fall in investment spending in Russia. The EBRD forecast for 2014 is slightly downgraded to 3 per cent. Growth is however expected to accelerate in 2015.

Azerbaijan’s economy slowed down considerably in early 2014 after growing 5.8 per cent in 2013. Preliminary estimates show that GDP grew by 2.5 per cent year-on-year in the first quarter of 2014 on the back of the fall in oil output. The non-oil sector continued to grow at a fast pace. Credit growth remained buoyant at the beginning of 2014 and showed little sign of moderating. Assuming that the fall in oil production is short-lived and the non-oil sector continues to expand, output is expected to grow at a rate of 3.5 per cent in 2014, in line with the EBRD’s January forecast.

After meagre growth in Belarus in 2013, preliminary estimates point to a growth of 0.5 per cent year-on-year in January-March 2014. Belarus’s economy is in urgent need of external financing to avoid a sharp adjustment and financial crisis. Timing, source and volume of external support and risks associated with potential expansionary economic policies in the run-up to the presidential elections in November 2015 are generating uncertainty. The EBRD’s 2014 GDP growth forecast has thus been revised down to zero, with large downside risks.

In Georgia, growth slowed down to 3.2 per cent in 2013 after a rapid growth period of 2010 to 2012. October’s presidential elections have lowered political tensions and paved the way for improved consumer and business confidence. The Association Agreement with the EU is expected to further boost exports. However, the Russia-Ukraine crisis will weigh on growth through lower regional export demand, more cautious investors, and possibly less favourable tourism revenues. The EBRD growth outlook for Georgia is thus moderately reduced to 4.0 per cent in 2014 and 2015, providing that the Russia-Ukraine crisis does not significantly deepen.

Moldova registered a record-high growth in 2013 of 8.9 per cent driven by agricultural recovery and related growth of manufacturing and trade. With the unfolding crisis in Ukraine and less investment in Russia in 2014, private remittances may weaken. The adoption of a visa-free regime with the EU could facilitate labour mobility and support remittances, while export demand for goods from Moldova may weaken further. Parliamentary elections in 2014 and problems in the financial sector are introducing an element of uncertainty. The EBRD predicts growth to moderate to 2 per cent this year and accelerate to 4 per cent in 2015.

Read the full Regional Economic Prospects - May 2014 (944KB - PDF)

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