Launching its Transition Report 2008, in London, UK yesterday (25 November) the European Bank for Reconstruction and Development (EBRD) said growth in the EBRD region was likely to fall sharply in 2009 as a result of the global economic slowdown and turbulent financial markets.
The EBRD's Transition Report 2008, which tracks the economic performance and progress on reforms across EBRD countries, predicted overall growth would fall to +6,3% in 2008 from +7,5% in 2007 and drop further to +3,0% in 2009.
The EBRD's chief economist Erik Berglof urged countries where it invests - Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Turkmenistan, Ukraine, Uzbekistan - to place a high priority on the stabilisation of their banking systems.
Mr Berglof said continued growth in the region's economy in the early stages of the global crisis was a testament to remarkable reform achievements. But the region now faced a much less benign international environment and outflows of capital from emerging markets, risk aversion and the recession in key Organisation for Economic Co-operation and Development (OECD) economies would test the resilience of transition countries.
Mr Berglof added the rapid slowdown would mitigate the threat of inflation, while stabilisation of the world's banking systems would become the key priority for governments across the region.
"Stabilisation measures will need to be coordinated with other countries - both in Western Europe and in other transition countries - taking account of the inter-linking ownership structures in the region's financial system," he said.
The EBRD sees growth in Central Europe and the Baltics (CEB) slowing to +4,3% in 2008 from +6,3% last year and easing further to +2,2% in 2009. Growth in south-eastern Europe will rise to +6,5% this year from +6,2% in 2007 and then fall to +3,1% next year. Growth in the Commonwealth of Independent States (CIS) and Mongolia is predicted to slow to +7,3% this year from +8,5% and to drop to +3,45 in 2009.
The report also said there was a risk of even slower growth in the region next year if external funding suddenly fell away. "In particular, some countries continue to run excessive current account deficits combined with high foreign currency debt and are therefore prone to significant output reductions if capital inflows fall off rapidly," it said.
In a separate chapter on the impact of the global credit crisis on the region, the report said the deterioration in the overall financing environment could now result in a lasting and substantial slowdown in credit expansion. "If so, the consequences for the overall growth of economies in the transition region will undoubtedly be severe," it warned.
However, the report also noted that several factors could help the region avoid this worsening scenario or at least help it cope with the effects. It pointed out that government debt levels had been falling continuously since 2000, giving more policy flexibility should greater policy intervention be required. Business conditions had generally improved in recent years and labour markets were relatively flexible, which would allow for a faster recovery to potential growth.
The report also noted the continued progress over the past year in market-oriented reforms, especially in south-eastern Europe and in parts of the CIS and Mongolia.
Some of the least reformed countries such as Belarus and Turkmenistan have taken positive steps to open up markets and reduce the role of the state, while reforms have been particularly significant in European Union (EU) candidate and potential candidate countries in the western Balkans. Given the strong link between reforms and growth, this bodes well for the region's resilience to short-term fluctuations and prospects for long-term growth.