OREANDA-NEWS. January 30, 2012. The EBRD has reduced its economic growth forecasts for 2012 for central and south eastern Europe, as well as eastern Europe and the Caucasus, and warned that a further deterioration of conditions in the eurozone could have a substantial further impact on the whole of the EBRD region, reported the press-centre of EBRD.

The Bank’s latest Regional Economic Prospects report also calls for a coordinated response from all parties to limit the impact of the eurozone crisis on eastern Europe.

The report sees a significant overall slowdown in growth across the EBRD’s 29 countries of operations from central and south Europe to central Asia – to an average 3.1 per cent in 2012 from 4.8 per cent in 2011.

Although this outlook is based on no further deterioration in the eurozone crisis, the report refers to "substantial risks" to the baseline scenario.

It says a worsening of the eurozone turmoil would pose a systemic challenge to emerging Europe because of the deep integration of its banking sector with eurozone-based banks, particularly if compounded by the re-emergence of uncoordinated national policies, with negative cross-border spillovers. The EBRD region would also be negatively affected by a resulting slowdown in the U.S. and elsewhere and from linked declines in commodity prices.

In its baseline scenario, the report assumes that deleveraging by international banks active in the EBRD region will be managed in a collective response that - as in 2008/2009 - involves governments, international agencies and banks, most likely in the context of a new “Vienna 2.0”.
Erik Berglof, the EBRD’s Chief Economist, said: “It is absolutely essential that we build a coordinated response to Western bank restructuring that fully takes into account the impact on eastern Europe. Any failure to do so would mean a significant set-back for the emerging economies.”

The forecast for 3.1 per cent growth across the whole EBRD region is roughly in line with predictions made last October, but the new report underscores a growing divide among the 29 countries surveyed.

It notes that central and south-eastern Europe is particularly exposed to eurozone stress and it points to Slovenia and Hungary as countries that are likely to see a return to recession in 2012. But it says Russia and other CIS countries that are less integrated with western Europe are continuing to enjoy respectable growth, partly as a result of elevated commodity prices.

The report says that turmoil in the eurozone will affect output in the transition region via financial, trade and remittance channels. A recession in the Euro area in 2012 would translate into weaker export markets for its eastern neighbours, with this effect compounded by the importance of foreign direct investment and shorter term financing for the EBRD region.

It noted that capital flows into the region had turned into outflows in the third quarter of 2011 – for the first time since 2009. This situation was unlikely to change while capital was scarce and risks remained high in western Europe. There has also been evidence of Western bank deleveraging in most new EU member countries since the autumn.

The EBRD report warns specifically that Western banks’ subsidiaries in eastern Europe will receive less support from parents that are having to strengthen their balance sheets. As a result the subsidiaries make less credit available to their economies and contribute to a slowdown in the real economy.

The report revised the 2012 forecasts for central Europe and the Baltic states down to 1.4 per cent from the 1.7 per cent seen last October.

Referring to Hungary, the country in the EBRD region that is most exposed to the eurozone, it said that the external problems faced by Hungary had been compounded by a series of domestic policy mistakes that had unnerved investors.

In southern and eastern Europe, the growth forecast for 2012 has been revised down by 0.6 percentage points to 1.0 per cent.

At the same time, the outlook for eastern Europe and the Caucasus, the closest to western Europe within the eastern transition regions, has somewhat worsened, with 2012 growth in eastern Europe and the Caucasus now seen at 2.6 per cent, compared with a previous 3.2 percent. The largest economy in the region, Ukraine, is likely to be quite affected by the eurozone crisis, with the most recent industrial production data already suggesting a slowdown.

The report forecasts that the economy in Ukraine will expand by 2.5 per cent in 2012, down from an estimated 5.0 per cent in 2011 and compared with an October forecast of 3.5 per cent for 2012.

The 2012 forecasts for both Turkey and Russia are kept unchanged from October at 2.5 per cent and 4.2 per cent, respectively. But the forecast growth rate for Turkey would be a sharp slowdown from the 8.0 per cent estimated for 2011. Central Asian growth is seen at 7.0 per cent in 2012, up from an October forecast of 6.6 per cent.