RIGA - As the heat of the global financial crisis begins to cool, consensus is growing that the Baltic countries may not see a quick return to high growth rates and foreign investment levels seen before the meltdown, says European Bank for Reconstruction and Development (EBRD) President Thomas Mirow, reports news agencies LETA 'sREUTERS. Their recent report cautions emerging European countries against underestimating the crisis, as more pain is yet to come.
"The crisis started in the financial sector, it then moved on to the real economy. The ensuing feedback to the financial sector will no doubt hit bank balance sheets again," said Mirow in preparations for a lecture to the economic research Joint Vienna Institute on July 24. He notes that the banking industry's 'broad stabilization' may fail to stop a steep rise in non-performing loans and possible corporate defaults, and there remain fiscal reform challenges, the need for well-functioning money markets and the continuing problem of regional foreign-exchange exposures, reports Bloomberg.
He said eastern Europe should now plan to target sustainable and lasting growth policies, while he expects demand for EBRD financing to remain high. "In the financial sector," he said in the speech, "and this is the most important piece of good news, we are seeing a broad stabilization." "However, the availability of loans has steeply declined, with a severe impact for business as well as private customers," he warns.
Eastern Europe is in its deepest recession since its communist days almost two decades ago, as the global credit crisis affects global trade and investment flows. The International Monetary Fund agrees that the region remains vulnerable to a withdrawal of capital and from sluggish demand in western Europe, its main export market.
Mirow worries that the EBRD is becoming more concerned about the cost of credit in eastern Europe and whether small- and medium- sized companies will be willing, or able, to invest because of the higher risk premiums, or interest rates, charged by banks, Mirow said.
It's not that much about liquidity available but whether it's at the right price," he said. Many of these small companies "would think about credit twice or three times before they accept the costs they would have to pay."
"The depth and breadth of the crisis means that we may not see a return to double-digit growth rates, record levels of investment and readily available finance," Mirow concludes. Central and Eastern Europe's economies are set to shrink by up to 5 percent this year, and the former Soviet Union economies by 5.8 percent, as exports to western Europe sink and capital inflows dry up, reports the IMF.
Latvia's gross domestic product (GDP) will drop by 18 percent this year, with economic growth forecast to resume only in 2011, says Latvia's Finance Ministry in its latest report. In 2010, GDP is expected to fall by 4 percent, but in 2011 is expected to increase by 1.5 percent.
Local banks throughout the region, bankrolled by their mostly western owners, fuelled the region's economic boom from 2000 to 2008, highly profitable at the time for banks in countries including Sweden and Austria, which invested heavily there.
"Although a systemic banking crisis has been avoided in the region, adequate capitalization of the banking system remains a prime task," Mirow said. "It will be important to recapitalize banks which have portfolio weaknesses because of the crisis but are otherwise regarded as sound and stable," he adds. He says that countries in the region must work to restructure corporate and household debt to curb defaults at the same time as reviving lending so that the recovery can be supported.
EBRD, the development bank, set up in 1991 to foster the ex-Communist bloc's transition to a market economy, recently boosted its investment target in the region for 2009 by 30 percent in response to the crisis.