Expected growth next year to remain fragile, says EBRD

  • 2009-10-22
  • Staff and wire reports
RIGA - The European Bank for Reconstruction and Development has forecast that the economies of former Soviet bloc nations will shrink 6.3 percent on average in 2009 before returning to growth next year, reports news agency LETA. "The economies of central and eastern Europe are expected to contract by an average of 6.3 percent in 2009 following steep output declines in the first half of the year," says the annual economic report.

The predicted contraction in gross domestic product is sharper compared with an earlier EBRD forecast, which had called for a drop of 5.2 percent across the group of countries.
"Signs of positive growth in the third quarter of 2009 suggest that the recession is now bottoming out in many countries of the EBRD region. However, any upturn in 2010 is likely to be fragile and patchy." The report says that "There are likely to be significant cross-country differences in output growth [next year], masked by an average growth rate for the region of about 2.5 percent."
But the bank warns that, even though the risks of a region-wide banking crisis are now low, countries have to reform their economic strategies to reduce their dependence on foreign capital and improve the regulation of foreign banks.

"Foreign banks contributed to higher debt levels and had some role in fueling credit bubbles. They also have played a role in increasing foreign exchange exposure which has turned out to be a major vulnerability," says chief economist Erik Berglof. "We need to find ways of addressing the failures of this model without fundamentally changing it."
The bank's figures conceal big variations among the EBRD's 28 countries of operation. Estonia, Latvia , Lithuania and Armenia are likely to see GDP contractions of more than 10 percent this year. Latvia, Lithuania, Hungary and Bulgaria are expected to remain stuck in recession in 2010, even as neighbors move slowly into positive territory.

The recovery will be modest in comparison with the big increases in GDP before the crisis, including 7 percent (average) in 2007, says Berglof. "It is also clear that the social costs of the global economic crisis are only likely to be felt in earnest next year when corporate bankruptcies and unemployment will continue to rise. Growth over the medium term in the EBRD region is likely to be below the trend experienced over the last decade."

Growth will be restrained by the subdued pace of export market recovery and continuing tight credit conditions, as banks continue to shrink assets in the region and bad loans rise. The countries with fixed exchange rates, including Latvia, face difficulties because they must adjust their real exchange rates through domestic wages and prices. States that started the crisis in good shape and that are internationally competitive, such as Poland, Slovakia and Slovenia, could see GDP growth of 2 - 5 percent next year. But Hungary, with a difficult fiscal position, is forecast to remain in recession.

Neighboring Russia's economy is expected to shrink by 8.5 percent in 2009 followed by a return to growth of about 3.0 percent in 2010, it added. The report warns that predicting the recovery in Russia, the region's largest economy, and Kazakhstan, the biggest in central Asia, is difficult because their strong fiscal reserves offset weaknesses in banking and their commodity-dependent economies. For Kazakhstan, the bank foresees a 1.5 percent decline followed by a weak recovery of 1.5 percent.