The EBRD’s Penumbral Pendulum
The EBRD’s regional economic team cut GDP growth this year to less than 1.5 percent due to Russia/Ukraine’s “heavy shadow” battering both economies against the background of “fragile” Eurozone recovery. Sector sanctions now target Russia’s state energy producers and banks as capital outflow was $75 billion in the first half and gas shipments to Ukraine have been suspended for months on winter’s cusp. In the Euro area investment recently turned positive for the first time since 2011 as monetary policy was further eased with low VIX globally. In Central Europe and the Baltics Hungary aided households with EU grants and mortgage relief while Estonia’s output shrank on diminished Scandinavian exports. Serbia was hit by floods and Bulgaria by bank failure as it agreed to join the single supervisory mechanism. In the CIS Georgia and Moldova along with Ukraine signed association pacts with Brussels, with the outgoing parliament in Kiev delaying import liberalization until the end of 2015. Central Asia suffered decreased remittances and Turkey and Mediterranean basin countries just added as members have experienced slowdowns on their own geopolitical and political challenges, including labor strife in Tunisia approaching elections. Russian portfolio flows have diverted to previously unpopular Turkish assets, but syndicated lending in the EBRD’s jurisdiction was down 60 percent through June. Along with Ukraine’s hyrvnia, the Kazakh tenge, Kyrgyz som and Mongolian togrog have depreciated deeply against the dollar. Foreign banks continue to reduce exposure as Cyprus has the worst NPL ratio at 50 percent and Slovenia’s corporate credit stalled. Inflation has been manageable and deflation has appeared with private sector deleveraging in some countries, although prices have spiked with currency devaluation in Belarus and elsewhere. Assuming the Russia-Ukraine conflict ebbs growth should improve next year but the report also fears the post-communist peace dividend could disappear with new military spending needs. For Ukraine fiscal balance will remain precarious with defense outlays, while Russia’s long-term business climate must be upgraded at both the federal and provincial level to tackle commodity dependence and population aging beyond the current war footing.
North African members were cited for poor performance with Moroccan agriculture hurt by lacking rain and Tunisian industrial and phosphate results “timid.” The latter criticism came on the heels of a World Bank policy brief on the “unfinished revolution” stuck in a low wage and productivity trap with longstanding distortions between offshore and onshore activity. Labor and industry protections are excessive with the state still dominating the economy. The cost of international calls without competition is tenfold the global average and in banking three government institutions control 40 percent of assets. The coast is favored over the interior in employment and tax treatment and firms have chosen to stay small to avoid official bureaucracy and interference. Exports involve mainly unskilled auto and machine assembly for France and Italy, and although the Ben Ali clan no longer takes one-fifth of private profits the stock market role remains “marginal” in company financing especially for start-ups never seeing daylight, the review admonishes.
