TBILISI (Reuters) - New forecasts from the European Bank for Reconstruction and Development painted a marginally brighter picture for its 35-country region on Thursday, but predicted Ukraine’s economy would now slump by a more-than-expected 7.5 percent this year.
The EBRD, created in 1991 originally to invest in the former Soviet bloc countries of eastern Europe, is holding its annual meeting in the Georgian capital Tbilisi against the backdrop of the worst East-West standoff since the Cold War.
Its latest forecasts pointed to a growing divergence in economic fortunes across the region, with the impact of tensions over the Ukraine overshadowing tentative signs of improvement elsewhere.
Whereas Ukraine is expected to contract even more than it did last year and more deeply than the 5.0 percent the EBRD forecast in January, core economies such as Poland are expected to pick-up on the back of record low interest rates both domestically and in their biggest export market, the euro zone.
Russia is expected to remain in a deep recession as Western sanctions bite, though the EBRD now sees its economy contracting 4.5 percent this year compared with 4.8 percent it forecast in January as global oil prices rebound. That is still below last month’s IMF forecast.
“There is definitely scope for optimism especially in countries closely tied to the euro zone,” said acting EBRD Chief Economist Hans Peter Lankes. “But the Russian recession is cause for concern in many other economies.”
In recent years, the bank expanded its reach beyond eastern Europe and ex-Soviet central Asia to include Mongolia, Turkey and the economies affected directly or indirectly by the Arab Spring such as Morocco, Egypt, Tunisia and Jordan.
Egypt is now expected to grow at a slightly faster 4 percent while Turkey, where the EBRD now invests the largest proportion of its money after it stopped lending in Russia, is expected to track sideways at a below-par 3 percent for the next two years.
“Turkey’s competitiveness with the euro zone would be squeezed (by a lower euro) while its borrowing costs and pressures for capital outflows would increase as U.S. monetary policy tightens,” the bank said.
The deep recession in Russia is having a larger-than-expected effect on countries with which it has strong economic links, including the eastern Europe, the Caucasus and Central Asia.
Russia is expected to shrink close to 2 percent next year, whereas almost every other country the EBRD operates in including Ukraine is forecast to see a pick-up.
“(Russia) may face a protracted period of slow growth or stagnation. Low oil prices and sanctions have taken their toll on an already weak economy with deep-seated structural problems,” the EBRD said.
It raised its 2015 forecast for the central European and Baltic states to 2.9 percent from 2.6 percent, though that was mainly reflecting the stimulus spill over for central Europe from the European Central Bank’s 1 trillion euro QE programme.
In contrast, Latvia and Lithuania, despite being euro zone members, saw downgrades with neighbouring Estonia also flat. The value of exports to Russia in the first two months of 2015 dropped by between 30 and 50 percent year-on-year in the three countries.
Greece, the EBRD’s newest country of operation this year, is expected to see no growth this year. That came with an added warning that the volatility created by its battle to stay in the euro could have a region-wide impact in coming months.
“The EBRD’s base case scenario is that Greece will ‘muddle through’, avoiding drastic policy moves and with just enough reforms to start growing and securing the continued support of the international community,” the EBRD said.
Growth in Georgia where the bank’s meeting is being held but where the government has just come close to collapse, is expected to decelerate to 2.3 percent this year from a forecast of 4.2 percent in January.
Belarus, which is sandwiched between Russia and Ukraine, also remains under stress, with its forecast revised down to a 2.5 percent contraction and stagnation in 2016 in the absence of any significant economic reforms.
Reporting by Margarita Antidze; Editing by Kim Coghill