Credit crunch may hit growth in Eastern Europe, CIS-EBRD

EU

The global credit crunch could hit longer term growth in Eastern Europe and the former Soviet Union and more structural reforms are needed, the European Bank for Reconstruction and Development said on Thursday. Southeastern Europe leads in speed of reform.

Growth in the 29 transition countries tracked by the European Bank for Reconstruction and Development - the development bank for the region - may reach a record high of 7.0% in 2007, up slightly from 6.9% in 2006, the EBRD said in its annual transition report. But the EBRD forecast growth falling to 6.1% in 2008, as woes in the US subprime mortgage sector drive up borrowing costs around the world. “Perhaps the most surprising observation is how well the region has coped so far with (global) pressures ... but there will be an impact on growth. There are vulnerabilities,” Erik Berglof, chief economist at the EBRD, told reporters ahead of publication of the report. Contagion was hitting the region, as financial openness had increased rapidly in recent years, the report said. This was particularly likely to affect financial sectors and economic growth in countries with large financing needs in corporate or financial sectors. Kazakhstan and the Baltic states are seen by analysts as particularly vulnerable. Capital flows to the region were likely to fall slightly from the record levels of previous years, as the Eurobond market largely dried up in August and September.

Reform slowing
The pace of reforms as measured by EBRD transition indicators has slowed, the report said. Countries in south-eastern Europe continue to play catch up, but other reform progress has been more uneven, and more needs to be done to strengthen the financial sector and stimulate entrepreneurial activity. The EBRD said reforms in price and trade liberalization and small-scale privatization had largely been done. Large-scale privatization and financial sector reform had progressed in new EU member countries but was less advanced elsewhere. Reforms in corporate governance, competition policy and infrastructure had further to go in the most advanced countries in Central Eastern Europe and the Baltic states and were only at an early stage elsewhere in the region, the report said.

The private sector should also play a greater role in helping transition countries provide the level of public services that responded to people’s needs, the EBRD said. Satisfaction with the level of public services remains low, despite relatively high levels of public spending. Total trade between China and the transition countries rose almost five-fold to $74 billion between 2000 and 2006. The report said the region had so far been able to withstand the competition from Chinese exports in most sectors. But “as labor costs are increasing ... investments to upgrade technology and enhance productivity and quality are key in the face of growing competition from China.” Unemployment also remains a problem in many EBRD countries, despite recent signs of improvement. Low employment rates have become a major feature of the region, as people have dropped out of the labor market, the report said.

Balkan progress
Southeastern Europe’s patchy reform efforts since the collapse of communism has hampered the area’s European Union aspirations. But the EBRD said progress has been “relatively strong” in 2007, particularly compared with the former Soviet bloc’s EU members in central Europe, where the reform drive has hit snags. The bank praised Montenegro, which took its first step towards joining the EU in October, for maintaining reform momentum since it voted to dissolve its union with Serbia. In particular, it welcomed commitment to trade liberalization and competition.
Montenegro, the world’s newest state, has signed an accord with the EU that put it on the first rung of the ladder to eventual membership, not expected before 2015. Elsewhere among the former Yugoslav states, a full launch of Serbia’s EU accession process is on hold until Belgrade brings war criminals to justice. Only Croatia is generally seen having a realistic chance of joining the EU in the next five years, with membership for most of the other states seen some time between 2012-15 or later. The EBRD praised Bosnia for privatization progress and competition policy and Serbia for enhancing the activity of its competition authority.
However in central Europe, the EBRD said, “a lack of domestic political and social consensus has led to fragile coalition governments that are less inclined to pursue difficult reforms.” In Russia, reforms were limited but the EBRD praised a railway overhaul, while progress in Georgia stood out among other former Soviet states.

The EBRD was established in 1991 to aid the transition of Communist bloc countries to capitalism. (guardian.co.uk)

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