Macroeconomic performance and prospects
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Conditions in the global economy have changed dramatically over the past year. In 2000, when growth in the world economy was rapid and investor confidence was strong, the transition economies of central and eastern Europe, the Baltic states and the Commonwealth of Independent States (CIS) experienced their highest average growth rate since reforms began. Since the second half of 2000, however, performance of the world economy has progressively weakened and this has affected the transition countries through a slowdown in exports.
In September 2001 the terrorist attacks in the United States and the anticipated response to those attacks significantly heightened uncertainty regarding the outlook for the already weakened global economy and for the transition economies. These developments are likely to prolong the slowdown in the United States and further dampen growth in western Europe in the remainder of 2001 and early 2002. Despite the increased global uncertainty, the region as a whole is expected to record its third successive year of positive growth in 2001 at 4.3 per cent, following the 5.5 per cent growth achieved in 2000. The outlook for 2002 is less positive, with growth likely to slow down to around 3.4 per cent for the region as a whole. While the region is not immune to the global slowdown, compared with other emerging markets, most transition economies are relatively well-positioned for further growth.
Nonetheless, there are significant differences in the degree to which various parts of the region have been, and are likely to be, influenced by the world economy and by unfolding political developments. Having redirected economic activity towards Western markets and investors– in particular those in the European Union– central eastern Europe and the Baltic states (CEB) is most exposed to a global slowdown and international investors’ diminished appetite for risk. However, as the process of economic integration continued in the first half of 2001, export performance and foreign direct investment (FDI) remained relatively strong while rising domestic demand further contributed to robust macroeconomic performance. Nevertheless, CEB would be affected by a protracted slowdown in EU growth, in particular through greater external imbalances and heavier external and fiscal financing requirements.
Growth in south-eastern Europe (SEE) has been sustained by a recovery from economic and regional political crises. However, its pace is likely to slow down as policy will need to adjust to a much weaker outlook for exports as well as for private capital inflows. The CIS currently seems least exposed to the worldwide economic downturn. High oil prices have supported strong growth in Russia and this has benefited the rest of the CIS through trade linkages.
Following significant volatility in the aftermath of the terrorist attacks, future markets point towards a weakening of prices for Brent crude to the bottom of the US$ 22-28 range by year-end. This could negatively affect demand in Russia although oil prices would need to fall well below US$ 18 per barrel to fundamentally alter the outlook for Russia. Several Central Asian countries, particularly Tajikistan and Uzbekistan, may experience heightened political tensions. Moreover, the potential influx of refugees into Uzbekistan, Tajikistan and Turkmenistan, which border Afghanistan, may increase domestic tensions and impose a financial burden. Against these risks stand the benefits of increased Western financial support in exchange for military cooperation.
The ability of policy to respond to these challenges varies by sub-region. Structural fiscal deficits in CEB and a more challenging international investment climate limit the potential for fiscal policy to sustain domestic demand in the face of a prolonged global slowdown. Instead, fiscal policy may need to be tightened to maintain sustainable fiscal and external balances and investor confidence. While FDI inflows remain high, greenfield investments have been slow to replace earlier privatisation-related inflows, with a resulting shift in the composition of external financing towards potentially more volatile debt and portfolio flows. At the same time, monetary policy in the advanced EU accession countries is constrained by the aim of bringing inflation towards EU levels in preparation for membership of the exchange rate mechanism (ERM). However, the analysis in this chapter suggests that monetary policy should not aim for a rapid disinflation.
The constraints on macroeconomic policy in SEE are even tighter than those in CEB following years of instability, including high structural fiscal and external imbalances. The adoption of fixed exchange rates or currency boards in several countries has restrained these imbalances by firmly tying the hands of policy makers. In the face of weaker external demand, fiscal policy will need to be adjusted to limit external imbalances. However, SEE has significant scope for supporting growth and increasing private foreign financing of external imbalances through further progress in structural reform, as the recent success of Bulgaria demonstrates.
The CIS contains two groups of countries with differing policy responses. In energyrich Russia and the Caspian countries the main challenge is to deal effectively with trade surpluses and capital inflows associated with the booming resource sectors. This requires above all further strengthening of fiscal policy and the adoption of a medium-term fiscal framework. The other CIS countries should capitalise on the recent upswing to boost reform efforts and raise competitiveness on international markets to be able to reduce their dependence on Russia if its growth slows. In those states likely to be most affected by regional instability caused by military conflict in Afghanistan, immediate policy concerns will focus on raising revenues to finance security measures and handling the possible inflow of refugees. Support from the international financial community is therefore likely to assume increasing importance.
The chapter looks at the implications of a downturn in the global economy for transition countries. Section 3.1 outlines recent economic developments in the region and analyses the reasons for the relative resilience of growth. Section 3.2 considers the likely impact of a continued slowdown in the global economy and heightened uncertainty surrounding the outlook for the remainder of 2001 and 2002. It also evaluates the major risks to the general outlook. Section 3.3 discusses some of the key policy challenges for the region, focusing both on shortterm adjustment and medium-term policies to support growth. It considers the appropriate fiscal and monetary policy response in CEB and SEE in the short run, the importance of attracting and maintaining high FDI inflows to support growth in the future, the impact of the resource boom in Russia and the Caspian region, and the long-term consequences of the recent increase in trade between CIS countries.
The chapter is based on the analysis of macroeconomic data for all 27 of the EBRD’s countries of operations over the last 12 years, presented in Annex 3.1.
Additional macroeconomic indicators for individual countries are reported in the country assessments at the back of this Report. These indicators are primarily based on official statistics. While the quality of macroeconomic statistics in transition countries has improved, imperfections remain in some of the data. Given the difficulty of accounting for the large unofficial economies in some countries, the variation of country-specific definitions and the different composition of price baskets, cross-country comparisons should be interpreted with appropriate caution. Where official data are unavailable or unreliable, the analysis is based on EBRD staff estimates using secondary information from a wide range of sources.
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