East Europe Must Keep Revamping Economies, Development Bank Says

Eastern Europe’s recovery must be fortified by efforts to better compete for investment with other emerging markets as the U.S. Federal Reserve curbs stimulus, the European Bank for Reconstruction and Development said.

Net private capital flows turned negative in the third quarter for the first time since 2011 for the 34 emerging economies where the EBRD invests, the London-based bank said in a report today. The outflows will probably persist as U.S. monetary policy becomes tighter, the bank said.

“In the environment of greater differentiation among emerging markets, domestic policies will play a crucial role in supporting investor confidence and growth,” the EBRD said in the report. “Countries in the region need to resume structural reforms and tackle the persistent legacies of the crisis, including high rates of non-performing loans and long-term unemployment.”

Investors spared eastern European currencies and bonds because of their proximity to the improving euro region when the prospect of the Fed reducing its asset-buying program roiled emerging-market assets last year. With investors being increasingly picky, only countries with the best economic policies stand to continue to outperform, the EBRD said.

The Polish zloty, the Hungarian forint, the Bulgarian lev and the Romanian leu were among the five best performers against the dollar in the fourth quarter of 2013 among 24 emerging-market currencies tracked by Bloomberg, along with the South Korean won. The bottom five were the Argentinian peso, the Indonesian rupiah, the Brazilian real, the Turkish lira and the South African rand.

Growth Projection

The 30 eastern European and central Asian economies where the EBRD is active will expand 2.8 percent this year after 2.1 percent last year, the bank projected, increasing last year’s estimate by 0.1 percentage point from October.

Russia’s economy will grow 2.5 percent this year after 1.3 percent last year and Polish growth will quicken to 2.7 percent from 1.3 percent, the EBRD said. The Russian projection assumes a moderate increase in government spending, including on big-ticket infrastructure projects, while Poland will benefit from “highly supportive” monetary policy, it said.

The southern and eastern Mediterranean region, where the EBRD works in Egypt, Jordan, Morocco and Tunisia, is slated to grow 3 percent this year, down 0.1 percentage point from the October forecast, the bank said.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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