Young job seeker is interviewed at a job fair in Barcelona. Spain's youth unemployment remains among the highest in the European Union. (Photo: Gustau Nacarino/Reuters/Newscom)

Young job seeker is interviewed at a job fair in Barcelona. Spain's youth unemployment remains among the highest in the European Union. (Photo: Gustau Nacarino/Reuters/Newscom)

IMF Survey : Emerging Europe: Geopolitical Tensions Taking a Toll

October 10, 2014

  • Growth slows down in much of the region
  • Geopolitical risks and weak growth in the euro area weigh on the outlook
  • Reviving corporate credit and investment are crucial to secure a robust recovery

Overall economic growth is slowing down in Central, Eastern and Southeastern Europe (CESEE). The IMF has revised down the 2014 growth forecasts for the region to 1.2 percent largely reflecting the effects of Ukraine-Russia tensions.

A gas storage facility in Mryn, Ukraine. Geopolitical tensions could have a strong negative impact on Central, Eastern, and Southeastern Europe as the region relies on gas imports from Russia (Photo: Gleb Garanich/Reuters/Newscom)

A gas storage facility in Mryn, Ukraine. Geopolitical tensions could have a strong negative impact on Central, Eastern, and Southeastern Europe as the region relies on gas imports from Russia (Photo: Gleb Garanich/Reuters/Newscom)

REGIONAL ECONOMIC ISSUES

Inflation paths have also diverged across the region. Declining world food and energy prices and low imported inflation from the euro area have continued to pull down prices across most of CESEE except Turkey, Russia and the rest of the Commonwealth of Independent States (CIS), where high domestic food prices and exchange rate depreciation have kept inflation high, says the IMF in a report launched in Washington today.

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Significant risks

The report expects growth to strengthen in 2015 to 1.7 percent, assuming tensions gradually ease and sanctions and counter-sanctions are lifted or allowed to expire over the coming year.

However, several downside risks cloud the near-term outlook:

Sustained tensions surrounding Ukraine/Russia could have a strong negative impact on the region because of weaker confidence, weaker export demand from Russia, and reliance on gas imports from Russia, which account for a significant part of total energy consumption in many countries.

A more protracted slowdown in the euro area than currently envisaged could have a negative impact on growth and inflation in CESEE, especially with the evidence showing that non-euro area European Union (EU) countries are importing low inflation from the euro area (see chart).

Tightening in global financial conditions and renewed surges in global financial market volatility could hamper financing conditions as the region relies heavily on foreign funding.

An escalation of conflicts in the Middle East could lead to disruptions in global oil production, causing a sharp rise in prices. The impact on the region could be significant given that all CESEE countries (with the exception of Russia) are oil importers.

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In light of these risks, securing robust economic recovery remains the key near-term priority, while lifting potential growth is the main medium term goal, says the IMF.

Securing recovery

The report noted that recovery in corporate credit and investment is essential for robust and balanced growth. To that end, some countries (including many in Southeastern Europe) need a comprehensive strategy to address corporate debt problems and the large stock of nonperforming loans. Such a strategy should include fostering more out-of-court debt workouts and addressing legal, regulatory and tax impediments to the resolution of nonperforming loans, says the IMF.

Safeguarding against risks

In view of significant downside risks, the IMF recommended that CESEE counties should continue reducing macroeconomic imbalances by keeping fiscal and external accounts in order. Some countries (e.g., Croatia and Serbia) need urgent actions to put their fiscal deficits on a downward path, while others (e.g., Belarus, Ukraine, and Turkey) need to reduce current account imbalances. In the event of external funding shocks, countries should use monetary and exchange rate flexibility where possible, and let automatic stabilizers operate where there is fiscal space.

When facing the risk of deflation (falling prices), inflation-targeting countries should stand ready to frontload monetary easing if actual inflation starts to reflect falling inflation expectations, the report says, noting that the space for policy maneuver will also depend on financial stability considerations.

Given their heavy reliance on energy imports, CESEE countries need to make a concerted effort to improve their resilience to any potential increase in prices (or decrease in supply) of energy over the medium term. This could be achieved, for example, through a more integrated regional energy market to help pool gas and oil reserves and limit the impact of energy shocks on individual countries, says the report.

Lifting future growth

To achieve high and sustainable growth over the medium term, the IMF urges the region’s policymakers to simplify regulations, reduce barriers to entry, and improve functioning of the labor market, particularly in Southeastern Europe.

For many countries in the region, the transition agenda remains incomplete. These countries need to foster competitiveness by improving governance and transparency, increasing the role of the private sector, and accelerating the restructuring of loss-making state-owned enterprises, says the IMF.

For CESEE countries in the European Union (EU), it would also be very important to increase the utilization of EU funds, which would enhance the infrastructure and, hence, bolster competitiveness, the report says.