Balkans Vulnerable to Eurozone Crisis, EBRD Says

In a new report, the European Bank for Reconstruction and Development, EBRD, underlines that Southeastern Europe remains vulnerable to the on-going crisis in the eurozone, owing to its exposure to the Greek and other eurozone periphery economies.

The report says the negative impact of the eurozone crisis on growth in the region through overall capital outflows may have lessened, but its effect on lending through cross-border bank deleveraging was continuing.

"Financial sector vulnerabilities constitute the biggest risk, given that the vast majority of the banking system is foreign owned and given the reliance in most countries on funding from abroad," the report said.

The report noted that Albania continued to grow faster than other countries in the region in 2011 but experienced a slowdown in the second half of 2011 and in early 2012, largely due to the weak performance of its key EU markets, Greece and Italy.

"Albania’s strong trade, investment and remittance ties to these countries are likely to continue to constrain growth in the coming year, while public debt is close to the statutory limit of 60 per cent of GDP, limiting the room for fiscal manoeuvre," the report added.

In Bosnia, the report said that the economy had been relatively stable in the past couple of years, but domestic consumption remains subdued, largely due to fiscal austerity measures and to falling remittances.

According to the report, in the short term the country could benefit from a continued strong demand for certain export products, such as metals and timber, which may compensate for weaknesses elsewhere in the economy.

Recovery is expected to continue to be modest in Bulgaria in 2012 due to sluggish export demand. However, the government continues to adhere to fiscal prudence, with the government budget marginally in surplus in the first five months of the year, the report said.

The economic situation has also been worsening in Croatia, the EU's future 28th member state, with the economy being "technically in recession".

According to the report, growth for the rest of the year in Croatia is likely to be non-existent or negative, reflecting the overall lack of competitiveness in the economy.

"The signing of the EU Accession Treaty at the end of last year and the realistic prospect of full EU membership in mid-2013 are positive signals for the medium term and may help to revive confidence and investment," the report said.

In Macedonia, GDP fell by 1.4 per cent in 2012 and growth for the year is forecast to decline significantly compared to the previous year.

"The weak external environment will continue to negatively impact [on] the economy of FYR Macedonia this year," the report underlined.

Montenegro’s economy is still struggling to recover from the effects of the crisis with a high account deficit, volatile industrial production and negative credit growth.

The report has also raised concern over the continued uncertainty over the future of the aluminium complex KAP, which has been making significant losses.

The slowdown in the eurozone is already having a significant dampening effect on Romania’s exports and evidence of deleveraging from cross-border banks highlights the importance of the financial sector crisis transmission channel.

"The weak external environment and the political crisis that arose in July could negatively affect short-term growth," the report added.

Serbia’s economy was reported as showing several weaknesses. While the risks mainly stemmed from exposure to the eurozone, domestic policies were adding to uncertainty.

The EBRD report suggests that Serbia's new government, which was sworn in on Thursday, faces a major challenge in getting fiscal accounts under control and bringing down public debt.