Among emerging market regions, CEE economies are experiencing the steepest roller-coaster ride in terms of growth. After exceeding global growth averages for the last decade, regional growth is plummeting in 2009 and is expected to underperform both emerging Asia and Latin America. All EU newcomers in the region are either in or headed for recession. A dangerous combination of falling exports and slowing capital inflows is behind the bleak growth picture. The hardest-hit economies have tended to be very open, with wide current account deficits in recent years and high levels of foreign currency borrowing.
Not all CEE economies are in the same boat. The Czech Republic and Poland, for example, are considered relatively healthy and are expected to experience relatively mild contractions in 2009. Those in more dire straits- Estonia, Latvia, Lithuania--are facing double-digit contractions. Hungary, Latvia, Romania and Serbia have already turned to the IMF for financial assistance, and more are likely to follow in their wake.
RGE Monitor points to the following as possible downside risks to regional growth:
- risk of regional financial contagion,
- potential for a cross-border banking crisis
- rising political instability
- repeat of January gas crisis
Given the strong financial and trade linkages with Western Europe, a recovery in Eastern Europe will not come until its western neighbors’ economies improve. That means the region’s recovery will lag behind that of Western Europe. Meanwhile, the downside risks described above could further delay recovery. And even when recovery comes, RGE expects sluggish positive growth in the medium-term, rather than a return to the soaring growth rates seen earlier this decade.
Previously chief of EBRD warned that recovery in Eastern Europe is strongly linked to western banks (ability and willingness) lending to their foreign units.Bloomberg quotes him:
“The key is continued support from banks in Western Europe to their subsidiaries in the east,” Berglof said in an interview yesterday in London. “As long as those flows continue, that’s a very large part of the solution to the problem. The situation is manageable but we must make sure that it is being managed.”
He reportedly was very pessimistic:
In May, the EBRD forecast that the Central and Eastern European economies would contract by about 5.0 percent this year.
But the bank was about to release an even lower forecast, EBRD president Thomas Mirow said after meeting Austrian Finance Minister Josef Proell.
Unlike other institutions, the EBRD did not believe the crisis was over, Mirow said.
Many of the once fast-growing ex-communist economies lately have been hit by collapsing demand and vanishing foreign investment flows, leaving large foreign-currency debts and current-account deficits. Already, many have turned to the IMF in the crisis, which so far has toppled governments in Latvia, Hungary and Bulgaria.
To prevent a recurrence, Mr. Mirow said Eastern European countries need to restructure private debt, reduce foreign-exchange exposure and adequately capitalize banks.
He cautioned that, although the region's economies have stabilized in recent months, the impact of the "unprecedented market crisis" still poses major risks. "This is a severe challenge which we must not underestimate, neither economically nor politically, and we must not allow a sense of complacency to take hold," he said.
