RIGA - Eastern European growth rates will remain subdued in the coming quarters as the recovery in the U.S. and the euro region is losing steam, European Bank for Reconstruction and Development President Thomas Mirow said, reports Bloomberg. The London-based lender won’t revise its 3.5 percent economic growth forecast for this year for the 30 Eastern European and central Asian countries it invests in because the estimates “have been rather modest,” said Mirow. The bank sees 3.9 percent growth next year.
“Growth rates will not be impressive” as the slowdown in developed nations “will have an impact on the region,” Mirow said. “We will not revise downwards and we won’t revise up. We have been rather modest compared to the pre-crisis situation.”
The former communist countries the EBRD lends to are rebounding from their deepest recessions since switching to free-market policies two decades ago. The recovery is clouded by the threat of a new U.S. recession and a slowdown projected for the euro area, the EBRD region’s largest export market. Fiscal austerity in the wake of the European Union’s sovereign-debt crisis also weighs on the pace of expansion.
Mirow also commented on Hungary, after Standard & Poor’s and Moody’s Investor Service last week repeated a threat to downgrade the country’s credit rating because the government needs to clarify its economic policies. Hungary’s government must reveal its long-term economic policies after local government elections next month, said Mirow. Prime Minister Viktor Orban’s pledge to reduce the 2011 shortfall to below the EU limit of 3 percent of GDP failed to reassure the ratings companies.
“What is important is that after the electoral event in October they make clear what will be economic policy,” said Mirow. “What needs to be clear is what will be the long-term approach to reducing the public deficit.”
The latest survey by the ZEW Center for European Economic Research and Erste Group Bank provided further evidence of a slowdown ahead. East European investor confidence declined in September as exporters anticipate a global slowdown, according to the survey. An index of investor and analyst expectations for Eastern Europe’s economy over the next six months fell 3.2 points, to 17.3 points, this month.
The U.S. economy will expand “at a relatively modest pace” in the second half, Federal Reserve Chairman Ben S. Bernanke said in an Aug. 27 speech, heightening investor concern about a return to recession in the world’s largest economy.
Investor confidence in Germany, Europe’s largest economy, also dropped in September, ZEW said today. The European Commission said last week that economic growth in the euro region may slow by 50 percent, to 0.5 percent, in the third quarter and weaken to 0.3 percent in the fourth.
The EBRD remains concerned about the level of outstanding foreign-currency loans at East European banks, after they brought some countries, including Latvia, to the verge of default during the global credit crisis.
“The EBRD is particularly concerned about households’ large borrowing in foreign exchange,” Mirow told a panel at the conference. “This practice has proven to be a source of serious systemic risks. It needs to be addressed now as the recovery is gradually taking hold.”
Underdeveloped financial markets, low saving rates and high local interest rates contributed to a surge in foreign currency loans during the boom years. The region’s banks struggled to refinance foreign-currency mortgages, car and consumer loans because their parents in Austria, Italy, Germany and Sweden reduced funding during the credit crunch.
The EBRD has spearheaded efforts to limit dependence on foreign-currency borrowing and will soon publish the findings of a working group that includes the banking industry and World Bank and International Monetary Fund experts on ways to combat the problem, Mirow said.
New capital requirements for banks agreed in Basel, Switzerland, two weeks ago are “demanding but not excessive,” Mirow said. “This is particularly important for the current protracted recovery phase, where a much stronger increase in capital requirements could have stifled the much-needed resumption of credit,” he said.