OREANDA-NEWS. Economic growth across Central and eastern Europe and the Commonwealth of Independent States reached its highest level since the collapse of communism in 1991, says the EBRD in its latest Transition report update. At 6,9 per cent regional average growth rose a full percentage point above its 2005 level, and the strong performance is expected to continue in 2007, with average growth anticipated to slow slightly to 6,5 per cent, reported the press-centre of  EBRD.


The fastest growth was recorded in the CIS and Mongolia, at 7,5 per cent, against 6,8 per cent in 2005. This was largely due to continuing high commodity prices but also strong domestic demand. The outlook for 2007 for these countries is similarly favourable, with an expected average growth rate of 7,2 per cent. Russia, the largest economy and an important driver of growth for the entire CIS, grew at 6,7 per cent (6,4 per cent in 2005), fuelled by investment and consumption. Inflation was in single digits for the first time since 1991 and continued to decline in the first quarter of 2007. Spending on national projects is expected to increase significantly, but government plans to introduce a medium-term fiscal framework and greater flexibility in the rouble exchange rate could contain price pressures. With elections scheduled for 2007 and 2008 a key challenge will be to maintain current buoyant investment activity and to moderate pre-election spending.


Other countries in CIS also grew strongly in 2006. Azerbaijan was again among the top performing economies in the world, with growth of 34,5 per cent (26,4 per cent in 2005) on the back of fast expanding oil and gas exports following the opening of the Baku-Tbilisi-Ceyhan pipeline. In Ukraine growth was a robust 7,1 per cent, (up from 2,6 per cent the previous year) driven by strong domestic demand and a recovery in international metals prices, Ukraine’s main export. The economy proved surprisingly resilient to a sharp sudden increase in energy import prices in 2006. Other countries in the region fared less well, however, in the face of similar external price shocks. Moldova’s growth rate slowed considerably, down to 4 per cent from 7,1 per cent in 2005, due to the increase in gas import prices and a temporary ban on wine and agricultural exports to Russia. Georgia, which also experienced twin shocks on the demand and supply side, saw only a slight reduction in GDP growth in 2006 at 9,4 per cent (against 9,6 per cent in 2005).


South-eastern Europe also grew strongly in 2006 at 6,4 per cent on average (up from 4,8 per cent in 2005), with notably impressive performances in the two new EU member states, Bulgaria and Romania, as well as in Montenegro. Prospects for 2007 also look favourable, with growth forecast at around 5,7 per cent. The region is benefiting from an industrial revival, expanding exports and a record inflow of foreign capital. Foreign direct investment doubled from just over US$ 13 billion in 2005 to around US$ 26 billion in 2006. In many countries these inflows are complemented by sizeable remittances from workers living abroad. The stronger-than-expected growth across the region last year has supported a good fiscal performance although there are worrying signs for a looser fiscal stance this year in Bosnia and Herzegovina, Romania and Serbia. Price pressures have abated in the region, with notable recent declines in Bulgaria, Croatia, Romania and Serbia. The decline in world oil prices in the second half of 2006 has helped, though policy measures such as monetary tightening (as well as delays in administrative price increases in some cases) also played a role.


Central and Eastern Europe and the Baltic states continue to benefit from the institutional and economic security of EU membership. At a weighted average of 6,2 per cent (up from 4,8 per cent in 2005), growth was the highest recorded since 1991, reflecting strong consumption and investment growth and increasing confidence in the region. Growth was particularly strong in the Baltic states as well as in the Slovak Republic. The outlook for 2007 is for a slight moderation in growth to 5,5 per cent, with a marked slowdown likely in Hungary. Despite booming economies and a continued favourable global economic environment, macroeconomic vulnerabilities remain. In particular, in several of the new EU member countries buoyant demand and credit markets have created inflationary pressures, not least on asset prices, and led to growing external deficits. With the exception of Slovenia, which adopted the euro in January 2007, and the Slovak Republic, accession to EMU continues to drop further down the political agenda.


The EBRD also identifies political risks in selected countries in South-eastern Europe, where the future of Kosovo in particular remains unclear, and in the CIS, where there are concerns about political and legal stability in the Kyrgyz Republic. The CIS countries and Mongolia continue to benefit from elevated commodity prices, but also strong growth in China, which is becoming an increasingly important partner. However, growth and stability in these resource-rich countries will depend on careful management of resource revenues and a renewed push on structural reforms.