EBRD cuts forecast for central Europe, N Africa economies

Reuters

London

The European Bank for Reconstruction and Development cut its growth forecasts for central and eastern Europe and North Africa yesterday, citing weak demand for their exports and unfinished reforms.

Deflationary pressures were also coming from the eurozone, but internal risks of deflation were limited, the bank’s chief economist said.

The EBRD’s forecasts for its regions of operation included a drop of half a percentage point for the biggest economy, Russia.

“There is weak growth despite the eurozone pick-up,” EBRD chief economist Erik Berglof told a news conference, pointing to low levels of structural reforms, high unemployment that was eroding skills and low investment.

“Inflation has slowed, particularly in central and southeastern Europe. Part of this is reflective of demand conditions in the region but it is also in part from deflationary pressures coming from the eurozone.”

The European Central Bank cut interest rates to a record low of 0.25% last week, after eurozone inflation slumped to 0.7% in October.

The EBRD cut its 2013 forecast for central and eastern Europe to 2% from 2.1%, and dropped its 2014 projection to 2.8% from 3.1%.

It cut its 2013 forecast for Russia to 1.3 from 1.8%, and for 2014 to 2.5 from 3%, citing subdued investment and a drop in the price of the country’s main export, oil. It put growth at 3.4% last year.

Russia last week slashed its long-term growth forecast to an average annual 2.5% by 2030, down from 4%.

The bank, which focuses on investment in the private sector, also cut its forecasts for its newest countries of operation — Egypt, Jordan, Morocco and Tunisia.

Growth for these North African and Middle Eastern economies was seen at 2.8% this year and 3.5% in 2014, down from 3% and 4.1%, respectively. Political instability remained a concern in Egypt and Tunisia, the EBRD said.

The EBRD cut its forecast for its overall central and eastern Europe and North Africa region of operation for this year to 2% from 2.2%, and for next year to 2.8 from 3.2%. It saw growth last year at 2.7%.

The likelihood had decreased of a worsening eurozone crisis but was still a risk to the forecasts, the EBRD said.

Other risks came from a slowdown in China and other large emerging economies, and from a deadlock over raising the US debt ceiling.

The bank sees an economic contraction next year in eurozone member Slovenia, which is at risk of a bailout.

Slovenia could benefit from the framework provided by support from the IMF or other international financial institutions, Berglof said, but may be able to avoid an immediate crisis through borrowing in international markets.

“Slovenia will definitely need capital from the outside to deal with its problems,” he said.

“The expectation right now from the government’s side is they can get this from the markets, and it seems when we talk to market participants ... (that) they might be able to get that type of money.”

Non-performing loans also continue to weigh heavily on bank balance sheets, in particular in Kazakhstan, virtually all southeastern European countries, Ukraine, Slovenia and Hungary.

A withdrawal by western banks from the region had slowed, but was still a concern, Berglof said.

“De-leveraging we expect will continue for several years more.”