East Europe Seeks Growth Drivers as Development Bank Meets

The European Bank for Reconstruction and Development meets today and tomorrow in Istanbul as the 34 countries it invests in, from Russia to Morocco, seek to kickstart their economic recoveries.

EBRD President Suma Chakrabarti will try to convince the development bank’s shareholders at their annual meeting today that more of the 30.5 billion euros ($39.8 billion) it has to invest through 2015 should go to building projects and small-and medium-sized businesses to fuel economic expansion, he said in an interview last month. He will also urge nations receiving EBRD funds to overhaul their economies to enable faster growth.

“Governments almost everywhere need to ensure that they pursue crucial economic and political reforms and improve business confidence,” Chakrabarti said today. “The EBRD stands ready to support partner governments and private-sector clients in their reform efforts.”

Emerging Europe, where foreign capital inflows and easy access to credit fueled growth of more than 5 percent a year before the global crisis of 2008, is being hurt through trade and banking links to the recession-hit euro area. The euro crisis and western banks’ efforts to clean up balance sheets have undermined a growth model in the post-communist east that was propelled by exports and foreign investment.

The MSCI Emerging Europe Index fell 1.2 percent to 465.21 as of 2:32 p.m. in London.

Capital Withdrawn

Economic-growth prospects have worsened as the region’s largest economies, Russia and Poland, slow “significantly,” the European Bank for Reconstruction and Development said.

The 30 eastern European and central Asian countries where the EBRD invests will expand 2.1 percent this year, the London-based bank said today, cutting its January forecast of 3 percent. The economies expanded 2.5 percent last year and will grow 3.1 percent in 2014, the EBRD predicted.

Egypt, Morocco, Jordan and Tunisia will grow 3 percent this year, the bank said, lowering its January forecast by one percentage point. The countries will expand 4.1 percent in 2014, it forecasts. GDP grew 3 percent last year.

“The bottom line is that there’s not much reason for optimism,” EBRD Chief Economist Erik Berglof said today. “The answer is not more austerity and there isn’t any room for fiscal stimulus either. But in the immediate future, there needs to be some renewed emphasis on the key structural issues.”

Growth Laggard

Eastern Europe’s growth is lagging behind other emerging markets as foreign lenders such after Italy’s UniCredit SpA and Austria’s Erste Group Bank AG, which own about three-quarters of banking assets in the continent’s east, trimmed financing and capital to their units.

Support from western banks to the region grew to about $1 trillion in 2008 from about $200 billion in 2002, representing a quarter of gross domestic product, the IMF said last week in a report. About a third of those inflows were withdrawn between 2008 and 2012, it said.

While the process, known as “deleveraging,” slowed after the European Central Bank helped provide liquidity to banks, credit growth has remained impaired by a stock of bad loans and sluggish demand from borrowers amid an economic slump, the Vienna Initiative, a group of banks, regulators and policy makers that helped prevent an eastern European financial collapse in 2008 and 2009, said in a May 2 report.

New Recipients

To help cash-strapped businesses, the EBRD is focusing its resources on companies rather than direct support to banks, Chakrabarti said last month.

The bank last year invested 8.9 billion euros in its 30 recipient countries, mainly from the former Soviet bloc, financing a record 388 projects. It also committed 181 million euros to six projects in the southern and eastern Mediterranean region where it’s expanding.

The EBRD has said it will invest as much as 8.5 billion euros a year through 2015 in its current recipients. By then, it also plans to bring annual investments in new countries to 2.5 billion euros.

The bank, owned by 64 countries and by the European Union and the European Investment Bank, was created in 1991 to help former communist countries from the Balkans to central Asia transform their economies. It has lent 80.9 billion euros since then.