OREANDA-NEWS. Economic growth across the transition region is expected to hit a record high this year but the global credit crunch that began this summer could result in slower growth in the longer term, the EBRD said in its Transition Report 2007, reported the press-centre of EBRD.

The Report projects a weighted average growth of 7,0 per cent in all EBRD countries in 2007, up slightly from 6,9 per cent in 2006. Economic growth across the transition region has been underpinned by a combination of factors, including strong domestic demand, rising investment including foreign direct investment, significant remittances from workers abroad, rapid growth in domestic and foreign bank lending and, in some cases, high energy prices.

The EBRD Report said the broad economic outlook remained favourable and noted that transition countries were confronting the recent financial market problems from a position of record growth rates for the region as a whole.

Growth across the region for 2008 is forecast to moderate slightly to a weighted average of 6,1 per cent, with the resource-rich Commonwealth of Independent States (CIS) the fastest growing region.

Spill-overs from problems in the US mortgage market are nevertheless likely to have an impact, most notably in the form of a rise in the cost of external finance and, in some cases, a reduction of the amounts of external finance that is available. This might help the overheated economies in the transition region cool down. However, “In a less benign scenario, countries with high external funding needs may experience a stronger than expected economic downturn,” the Report said.

The Report noted that the financial openness of the transition region had increased rapidly over recent years. “The events in the financial markets this summer are therefore likely to affect financial sectors and economic growth in the transition region” the Report said.

The effects would be most pronounced in the transition countries with large financing needs in the corporate or financial sectors. Investor concern has been growing in particular about the Kazakh banking sector and the current account deficits in the Baltic States.

The Report suggested that, overall, capital flows to the region would be likely to fall slightly from the record levels of previous years. The Eurobond market was effectively inaccessible for many issuers in August and September 2007. There were also worries that the current risk-averse environment would lead to shorter loan maturities, possibly exacerbating maturity mismatches on banks’ balance sheets.

Growth outlook by region
Average growth in the CIS and Mongolia is expected to remain high at 7,8 per cent in 2007 and 7,0 per cent in 2008 as long as oil and gas prices remain high. This compares with 7,5 per cent in 2006.

Growth in Russia is expected to rise to 7,2 per cent in 2007 (from 6,7 per cent in 2006) and then drop back down to 6,5 per cent in 2008. In Ukraine growth is projected at 6,8 per cent in 2007 (down from 7,1 per cent in 2006) and then forecast to drop to 6,0 per cent in 2008. The fastest growing country in the region is Azerbaijan, which is expected to hit 30 per cent growth for 2007 and remain strong at a forecast 25 per cent in 2008.

While average inflation in this region is expected to remain steady this year and possibly fall in 2008, Azeri inflation is expected to rise significantly to 16 per cent in 2007 from 8,3 per cent in 2006. In Russia and Ukraine inflation remains one of the main worries from a macroeconomic perspective.

Growth in central eastern Europe and the Baltic states (CEB) is projected at 6,0 per cent in 2007, after 6.2 per cent in 2006. Growth is expected to moderate somewhat in 2008 to 5,2 per cent, in line with slowing global demand. The Transition Report said labour costs in these countries were expected to remain high while rising food prices following droughts in parts of Europe would push up inflation.

In the Baltic states, current account deficits were forecast to remain very high in 2007 and 2008. “Weakening price and cost competitiveness, low FDI and rising external debt all call for urgent action to moderate above-potential growth” the Report said. More decisive policy action is needed in these countries if they are to avoid currency adjustments, which in turn would affect the quality of bank assets.

In Hungary, the large share of foreign currency debt and the high current account deficit are concerns. Following Slovenia’s successful entry into the eurozone in 2007, only the Slovak Republic was likely to follow suit in the next few years.

Growth in south-eastern European countries (SEE) is expected to reach 6,1 per cent in 2007 (down from 6,4 per cent in 2006) and is forecast to remain at about the same level in 2008. The outlook for this region remains favourable in the medium term, the Report said. FDI is likely to remain high due to competitive wage levels and an improving economic and institutional framework. EU accession prospects for some countries have also buoyed investor sentiment.

The Report said risks in these countries included high current account deficits and concerns over competitiveness (especially in Montenegro and Romania), risks to inflation stemming from rapidly rising wages (in particular in Romania and Serbia) as well as fiscal loosening and rising food prices.

Several countries, especially Romania and Serbia, were combining lax fiscal and income policies. Bulgaria’s external and domestic imbalances were continuing to grow despite the adoption of ‘firm policy measures’. The Report said continued political stability along with further improvements to the business environment is crucial to make SEE attractive to investors.
The Transition Report 2007 will be available to the general public from Tuesday 13 November 2007.

However, journalists can download electronic copies of the report from http://press.ebrd.com. If you are a journalist and would like access to these pages, send your details to coppolas@ebrd.com.