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Oil-driven Russia downturn adds to weakness in EBRD economies

By Anthony Williams

Average EBRD growth now seen negative in 2015; oil price fall benefits nations less tied to Russia.
A sharp fall in the price of oil has piled pressure on an already fragile Russia, and is hitting growth in energy exporters and other emerging nations with close links to eastern Europe’s largest economy, according to the EBRD’s latest economic outlook, published today.
EBRD economists expect Russian GDP to shrink by close to five per cent in 2015, a major downward revision from September’s forecast of a contraction of 0.2 per cent.


Piroska M Nagy, EBRD Director for Country Strategy and Policy, gives an overview of the EBRD's latest economic forecast.

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However, the EBRD says lower commodity prices could benefit countries in Central and South-eastern Europe (CESEE) and the South and Eastern Mediterranean (SEMED), helping to offset the continuing negative effects of weak external demand from the eurozone.
On average, countries across the EBRD regions are now expected to see a contraction of 0.3 per cent in 2015, after a forecast of 1.7 percent growth in September
“Even this forecast is subject to considerable risks,” said Hans Peter Lankes, Acting EBRD Chief Economist. He referred specifically to the impact of any further large falls in the oil price, a further escalation in the Ukraine/Russia crisis and a possible increase in uncertainty in the eurozone.
On the positive side, the oil price decline - and resulting improvements in terms of trade - could help soften the impact on emerging economies of the expected normalisation of U.S. monetary policies.
The halving of oil prices has added to problems in Russia, whose economic growth was already slowing down amid uncertainty and weak investor confidence after the imposition of sanctions in 2014. Energy exporters Kazakhstan, Azerbaijan and Turkmenistan have also been negatively affected by the lower prices.
Even for energy importers in eastern Europe, the Caucasus and Central Asia, the oil price fall is a mixed blessing, as benefits are being outweighed by lower export demand and remittances from a weakened Russia.
The economies of Armenia and Moldova are now expected to stagnate in 2015, while in Belarus a contraction of 1.5 per cent is forecast.
The depreciation of the rouble has increased pressures on the currencies of economies with strong trade, investment and remittances ties to Russia, with the sharpest declines seen in Belarus, Turkmenistan and Armenia.
The Ukrainian economy remains in a particularly precarious state, the report said. In addition to the impact of the conflict in the east of the country, there is currently uncertainty about the volume and timing of international financial assistance. After a sharp contraction in 2014, a further fall of five percent is predicted for this year.
The EBRD report said future developments depended on both external and domestic factors, including the ability of the Kiev government to implement a number of key reforms, a reduction of the regional geopolitical risks, an end of fighting in the Donbas and adequately timed and scaled international support.
The report said domestic demand was supporting growth in Central Europe and the Baltics (CEB), where it was helping to offset weaker exports as growth in the eurozone remains anaemic.
Domestic demand was also a positive factor in some countries in south-eastern Europe (SEE). However, developments there have been mixed. Serbia entered a recession in 2014, with an already fragile economy weakened further by flooding in May. Its return to growth in 2015 (+0.5 per cent) will be less robust than expected in September.
The report said any uncertainty following elections in Greece on 25 January could weigh on the economies of central and south-eastern Europe.
“A scenario of renewed turbulence in the eurozone would have the strongest adverse impact on the economies of CEB and SEE, which have the closest trade and financial links with the single currency area,” the EBRD report said.
Turkey is expected to see growth of 3 per cent in 2015, supported by the lower oil import bill and potential monetary easing. However, continued weakness in external demand and lower spending by Russian tourists could be negative factors.
Lower oil prices will also be a positive factor in the southern and eastern Mediterranean region. However, significant benefits from oil prices may be partially offset by lower export demand, investment and remittances from the Gulf Cooperation Council countries.
Credit growth remained subdued in central and south-eastern Europe. A reduction by foreign banks of their exposure to this region has been largely offset by the growth of the domestic deposit base. Growth of credit to the corporate sector has remained particularly low and in many cases negative.
High non-performing loans (NPLs) are a key reason for weak credit growth. NPL ratios are close to 20 per cent in most countries in south-eastern Europe and Ukraine. In Kazakhstan they exceed 30 per cent while in Cyprus they are around 50 per cent, respectively.
Transcript of Press Conference: REP in EBRD Countries of Operations
  Actual Current Current EBRD Forecast in September 2014 EBRD Forecast in September 2014
Real GDP Growth
  2013 2014 2015 2015 Change Sept.-Jan.
Central Europe and the Baltic states          
Croatia -0.9 -0.5 0.5 0.5 0.0
Estonia 1.6 1.7 2.2 2.5 -0.3
Hungary 1.5 3.2 2.4 2.2 0.2
Latvia 4.2 2.5 3.0 3.7 -0.7
Lithuania 3.3 2.9 3.2 3.4 -0.2
Poland 1.7 3.2 3.0 3.3 -0.3
Slovak Republic 1.4 2.4 2.6 3.0 -0.4
Slovenia -1.0 2.7 1.6 1.0 0.6
Average* 1.5 2.8 2.6 2.8 -0.2
South-eastern Europe          
Albania 1.4 1.5 2.5 2.5 0.0
Bosnia and Herzegovina 2.5 0.9 2.7 2.7 0.0
Bulgaria 1.1 1.5 0.8 2.0 -1.2
Cyprus -5.4 -2.1 0.7 0.0 0.7
FYR Macedonia 2.7 3.8 3.5 3.0 0.5
Kosovo 3.4 2.5 3.5 3.5 0.0
Montenegro 3.3 1.3 3.0 2.5 0.5
Romania 3.5 2.6 2.8 2.8 0.0
Serbia 2.6 -2.0 0.5 2.0 -1.5
Average* 2.8 1.7 2.2 2.6 -0.4
Eastern Europe and the Caucasus          
Armenia 3.5 3.0 0.0 3.5 -3.5
Azerbaijan 5.7 2.8 1.5 3.0 -1.5
Belarus 1.0 1.5 -1.5 0.5 -2.0
Georgia 3.3 5.0 4.2 4.0 0.2
Moldova 9.4 3.0 0.0 4.0 -4.0
Ukraine 0.0 -7.5 -5.0 -3.0 -2.0
Average* 1.8 -2.6 -2.3 -0.5 -1.8
Turkey 4.1 2.9 3.0 3.2 -0.2
Russia 1.3 0.4 -4.8 -0.2 -4.6
Central Asia          
Kazakhstan 6.0 4.3 1.5 5.1 -3.6
Kyrgyz Republic 10.5 3.6 3.2 4.8 -1.6
Mongolia 11.7 6.0 3.5 5.5 -2.0
Tajikistan 7.4 6.7 4.4 4.4 0.0
Turkmenistan 10.2 10.2 9.7 10.0 -0.3
Uzbekistan 8.0 8.0 7.8 7.6 0.2
Average* 7.1 5.6 3.5 6.0 -2.5
Southern and Eastern Mediterranean          
Egypt 2.1 2.2 3.8 3.2 0.6
Jordan 2.8 3.1 3.7 4.1 -0.4
Morocco 4.4 2.4 4.6 4.7 -0.1
Tunisia 2.4 2.3 3.0 4.2 -1.2
Average 2.7 2.3 3.9 3.7 0.2
Average EBRD region (incl Cyprus)* 2.3 1.6 -0.3 1.7 -2.0
Average_commodity exporters* 2.0 1.0 -3.8 0.5 -4.3
Average_commodity importers 2.6 2.1 2.4 2.7 -0.3
*EBRD forecasts as of 16 January 2015; in per cent
* Weighted averages. The weights used for the growth rates are WEO estimates of nominal dolar-GDP for 2012.
**Weighted averages do not include Czech republic, for which EBRD no longer produces a forecast.
***EBRD figures and forecasts for Egypt's real GDP reflect the fiscal year, which runs from July to june. These are also used in the regional average.
****Commodity exporters include: Azerbaijan, Russia, Kazakhstan, Mongolia and Turkmenistan.
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