Europe’s Inescapable Smaller Economy Grind

The EBRD halved this year’s regional growth forecast to 1.5 percent on “unusually high” uncertainty from Russia-Ukraine fallout, which could bring recession there and throughout transition countries under a negative scenario. The lender noted that Croatia was already in that predicament and was placed under the EU’s excess deficit procedure with public debt at 60 percent of GDP, as the banking system has a 15 percent NPL ratio. The Slovak Republic in comparison will show 2 percent growth on domestic and German demand redeeming its decision to join the euro, which all the Baltic members have embraced with Lithuania due soon to be the last of the three to enter despite 20 percent Russian export dependence. The Southeast faces “big challenges” on fiscal, financial sector, and structural reform issues as FDI continues to lag the pre-crisis average. Albania has turned to the IMF with weak bank and corporate balance sheets exacerbated by Greece’s and Italy’s woes as immigrants return. Among the smaller states of the former Yugoslavia Bosnia and Herzegovina has extended its Fund program through 2015 but political stalemate has stunted investment and deterred remittances with the decentralization model an unconvincing precedent for current application to Ukraine. FYR Macedonia has been a business community favorite with its incentives and multilateral contingency line qualification, while Montenegro has an outsized 15 percent of GDP current account deficit that may be difficult to bridge with Russian tourism loss and it recently had to rescue an aluminum company. Kosovo remains the poorest with mass unemployment and poverty even with its addition to development bodies with independent recognition. In the Caucuses Armenia’s economy had “steep construction contraction” and a judicial ruling on pension changes could further dent private investor confidence against the precarious security backdrop. Azerbaijan will grow at half 2013’s 6 percent clip on oil production decline, although the sovereign wealth fund has ample assets bolstered by an inaugural external bond issue. Belarus’ growth is flat on 15 percent inflation, with foreign reserves critical at less than two months imports as President Lukashenko considers another term in 2015.

Georgia went to war with Moscow previously but will sign an EU association agreement in June after a presidential transition increased consumer confidence, the EBRD reports. The accord will ease agricultural trade barriers to allow 4 percent growth offset by diminished Russian visitor volume. Moldova is now in the revanchist geopolitical crosshairs in the Transneister strip as it presses Brussels for visa-free labor mobility with parliamentary polls approaching. In Central Asia, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan are also highly reliant on remittances.  Kyrgyz currency depreciation caused 5 percent inflation in Q1, and Tajik banks have steep NPL levels. Turkmenistan’s and Uzbekistan’s commodity exports have diversified to China and enabled double-digit GDP increases, as authoritarian rulers have embarked on showcase infrastructure projects that may “grind to a halt” in the Bank’s phrase with further CIS shudders.