Structural and macroeconomic impact of the crisis: an overview

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The past year of financial and economic crisis has proved exceptionally difficult for policy-makers across the transition region. There have been few new reforms, as reflected in the lowest number of upgrades to the EBRD transition scores since the start of transition. More encouraging, however, has been a near absence, so far, of reversals in transition, with only four downgrades.

The emerging global crisis left most transition economies largely unaffected until mid-2008, after which it hit hard as commodity prices collapsed, exports contracted and capital inflows stopped. This led to extraordinarily sharp output declines later in the year and in the first quarter of 2009. By the third quarter of 2009 there were signs that the downturn was bottoming out. However, unemployment and the volume of non-performing loans are expected to rise for several quarters to come, complicating and slowing the recovery in many countries.

Although there have been dramatic declines in national outputs, collapses of banking systems and currencies have to date been largely avoided (unlike the experiences in previous emerging market crises), for three reasons. First: although the region approached the crisis with large macroeconomic imbalances in many countries, financial sectors were relatively sound (compared with the Asian countries in the 1990s, for example). Second: except in a few countries, such as Latvia, Russia and Ukraine, reversals in net capital flows were mild across the transition region compared with the experience in previous crises. Lastly: there was an effective coordinated policy response to maintain financial stability, involving national authorities, international organisations and regional banking groups.

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