YEREVAN, January 27. / ARKA /. The economic recovery that began in most parts of emerging Europe last year is continuing in 2011 but facing increased downside risks. In its latest quarterly economic report on the region, the EBRD said growth in 2011 is likely to remain reasonably strong, showing average expansion of a little over 4 percent despite continued regional divergences. The report continues to forecast average growth for the EBRD countries of operations of 4.2 percent for 2010, unchanged from projections made in October last year.
Looking at the Caucasus, the report says Armenia has recovered from an exceptionally sharp output contraction during the crisis. The pace of growth has slowed down compared to the vigorous acceleration of the first months of 2010, largely reflecting a substantial decline in agricultural output. The authorities are pursuing fiscal consolidation and structural reforms under an IMF-supported program. The economy continues to benefit from large remittance inflows and substantial official financing.
The stronger than expected recovery in core Europe, strengthening remittance flows from Russia, and a measured recovery in credit growth have supported growth across the region during 2010 although in several countries a high level of non-performing loans is continuing to be a drag on balance sheets. In a few countries, summer droughts slowed growth. The EBRD also sees growth of 4.2 percent for 2011, broadly in line with previous forecasts. However, the report adds “downside risks have increased.”
On the positive side, the report notes that stronger-than-anticipated growth in the core eurozone, fiscal and monetary stimuli in the US, and rising commodity prices are likely to boost growth across the EBRD’s region in an increasingly private sector-led recovery. Fiscal consolidation will likely restrain growth in south-eastern Europe.
This diverse group of countries has benefited from stronger external demand, commodity price increases, and a revival of remittance flows, the new EBRD’s report says. However, vulnerabilities remain significant due to reliance on external demand to support growth (in particular in the EU and Russia), terms of trade pressures (as all countries except for Azerbaijan are net energy importers, and the Caucasus countries depend on import of foodstuffs), and volatility of remittances (Armenia, Georgia and Moldova).
All countries in the group experienced substantial growth in 2010, building in part on the base effects of the post-crisis output reversals and recent strengthening of external and domestic demand. Risks to the outlook are related to future developments of external demand, commodity prices, and stability of the domestic and, in some cases, broader European financial sectors, and continued international support (all of the EBRD region’s countries except Azerbaijan and Belarus have active IMF-supported programs).
Economic vulnerabilities in Georgia , including a large trade deficit, continue to be mitigated by a generous aid package from a wide range of donors, which has partly compensated for the collapse of foreign direct investment. While the fraction of non-performing loans has decreased in recent months, the banking sector remains vulnerable. The authorities are pursuing further structural reforms to maintain the country’s business friendly image and strengthen investor confidence.
Economic growth in Azerbaijan has slowed down as oil and gas production stabilized, but the non-oil sector recovered faster than expected. The pace of structural reforms accelerated somewhat as the authorities negotiate the WTO accession. The diversification of the economy remains important as risks associated with high oil dependence became apparent during the crisis, when oil prices declined. FDI inflows into the non-oil sector remain low. Immediate macroeconomic risks are mitigated by a very strong fiscal position.
The report says that the recovery in south eastern Europe continues to lag behind other transition economies with the exception of Turkey. In eastern Europe and the Caucasus, the Ukrainian economy has continued to recover from the 15 percent contraction seen in 2009. However, the regional drought in 2010 adversely affected agricultural production.
In the EBRD’s largest economy, Russia, growth momentum is expected to pick up again after slowing in the third quarter of 2010 when output was adversely affected by a heat wave, drought and forest fires, the EBRD report says. – -0-
