European development bank cuts growth forecast for emerging economies

ISTANBUL Fri May 10, 2013 6:01pm BST

Suma Chakrabarti, President of the European Bank for Reconstruction and Development (EBRD), address an audience during the bank's 2013 Annual Meeting and Business Forum in Istanbul May 10, 2013. REUTERS/Osman Orsal

Suma Chakrabarti, President of the European Bank for Reconstruction and Development (EBRD), address an audience during the bank's 2013 Annual Meeting and Business Forum in Istanbul May 10, 2013.

Credit: Reuters/Osman Orsal

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ISTANBUL (Reuters) - Europe's development bank slashed its 2013 growth forecasts for emerging Europe and North Africa on Friday by almost a full percentage point, saying a sharp slowdown in Russia would drag down the regional economy.

The European Bank for Reconstruction and Development (EBRD) said Russia's problems should galvanise the region to pull down barriers to new businesses and investment.

But the bank, originally set up to help Europe's ex-communist states, said manufacturing heavyweights Poland and Turkey were also undershooting its expectations.

"We have a slowdown compared with what we thought just a quarter ago," EBRD Chief Economist Erik Berglof told a news conference on the sidelines of the Bank's annual meeting.

"It's really a story of three big countries - Russia, Poland and Turkey. Turkey was overheating ... Its credit-fuelled boom has ended and we see a soft landing."

The EBRD cut its 2013 average growth forecast for all the countries in which it now operates, including some in North Africa, to 2.2 percent, down from last year's 2.6 percent and an earlier forecast of 3.1 percent.

"Operating conditions are likely to remain demanding," Suma Chakrabarti, president of the EBRD, told the annual meeting.

The troubles of the euro zone have long weighed on the EBRD's region. Host country Turkey has successfully tapped into export markets beyond Europe and the struggling Balkan economy of Serbia said on Friday it was now looking to the United Arab Emirates as well as Russia for investment.

The EBRD said what had seemed like a temporary weakening in Russia was in fact a trend slowdown, fuelled by a fall in global prices for its commodity exports and by lower post-election social spending.

This was a "wake-up call across the region to re-energise structural reforms that have been on hold since the start of the crisis," said EBRD Chief Economist Erik Berglof.

It now expects Russia's economy to grow just 1.8 percent in 2013 - barely half the 3.5 percent it had forecast in January and last year's 3.4 percent. Growth could pick up next year, but there was "no quick turnaround in sight."

Poland, the only European Union country to escape recession after the 2008 global crisis, will grow 1.2 percent this year, slowing from last year's 1.9 percent. The broader central European region is expected to grow just 0.8 percent, the EBRD said, trimming its January forecast of 1.2 percent.

Slovenia, Hungary and Croatia are seen stuck in recession, with Slovenia's economy contracting 2.5 percent as it tries to resolve its banks' bad debts without seeking international aid.

Berglof said Slovenia was moving "in the right direction" to clean up its finances, but added: "It's important there's some kind of framework around, whether it's the International Monetary Fund or something more informal," adding that foreign investors "need to have a sense of stability, a sense of predictability."

In the EBRD's new states, Jordan, Morocco, Tunisia and Egypt, termed SEMED (southern and eastern Mediterranean), Berglof said reducing subsidies would be key to cutting large fiscal deficits.

The growth slowdown is also gripping the countries which joined the EBRD after the 2011 Arab Spring overthrow of dictators in Egypt, Libya and Tunisia.

The bank predicts these economies will grow 3 percent in 2013 - on par with 2012 but a full percentage point below January forecasts. It sees Egypt, mired in political turmoil, growing 2 percent - way below the level needed to get more people into work - versus the 3.8 percent previously forecast.

Egypt "has exhausted almost all available policy space," it said. Standard & Poor's cut Egypt's credit rating to C, deep in junk territory, on Thursday.

Libya is seeking advice from the EBRD, a source close to the discussions said on Friday, as the country tries to rebuild its institutions after decades of dictatorship.

But some commodity producers in the EBRD's sphere are booming. Mining in Mongolia is forecast to generate 16 percent growth this year, accelerating to 17 percent in 2014, and Turkmenistan's gas will bring 10 percent growth.

(Additional reporting by Nick Tattersall in Istanbul; Writing by Sujata Rao; Editing by Ruth Pitchford)

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