UPDATE 1-EBRD cuts forecasts for Central European, North African economies

Carolyn Cohn
Monday, 11 Nov 2013 | 8:21 AM ET

LONDON, Nov 11 (Reuters) - The European Bank for Reconstruction and Development cut its growth forecasts for central and eastern Europe and North Africa on Monday, citing weak demand for their exports and unfinished reforms.

Deflationary pressures were also coming from the euro zone, but internal risks of deflation were limited, the bank's chief economist said.

The EBRD's forecasts for its regions of operation included a drop of half a percentage point for the biggest economy, Russia.

"There is weak growth despite the euro zone pick-up," EBRD chief economist Erik Berglof told a news conference, pointing to low levels of structural reforms, high unemployment that was eroding skills and low investment.

"Inflation has slowed, particularly in central and southeastern Europe. Part of this is reflective of demand conditions in the region but it is also in part from deflationary pressures coming from the euro zone."

The European Central Bank cut interest rates to a record low of 0.25 percent last week, after euro zone inflation slumped to 0.7 percent in October.

The EBRD cut its 2013 forecast for central and eastern Europe to 2.0 percent from 2.1 percent, and dropped its 2014 projection to 2.8 percent from 3.1 percent.

It cut its 2013 forecast for Russia to 1.3 from 1.8 percent, and for 2014 to 2.5 from 3.0 percent, citing subdued investment and a drop in the price of the country's main export, oil. It put growth at 3.4 percent last year.

Russia last week slashed its long-term growth forecast to an average annual 2.5 percent by 2030, down from 4 percent.

The bank, which focuses on investment in the private sector, also cut its forecasts for its newest countries of operation - Egypt, Jordan, Morocco and Tunisia.

Growth for these North African and Middle Eastern economies was seen at 2.8 percent this year and 3.5 percent in 2014, down from 3.0 and 4.1 percent respectively. Political instability remained a concern in Egypt and Tunisia, the EBRD said.

The EBRD cut its forecast for its overall central and eastern Europe and North Africa region of operation for this year to 2.0 from 2.2 percent, and for next year to 2.8 from 3.2 percent. It saw growth last year at 2.7 percent.

The likelihood had decreased of a worsening euro zone crisis but was still a risk to the forecasts, the EBRD said.

Other risks came from a slowdown in China and other large emerging economies, and from a deadlock over raising the U.S. debt ceiling.

The bank sees an economic contraction next year in euro zone member Slovenia, which is at risk of a bailout.

Slovenia could benefit from the framework provided by support from the IMF or other international financial institutions, Berglof said, but may be able to avoid an immediate crisis through borrowing in international markets.

"Slovenia will definitely need capital from the outside to deal with its problems," he said.

"The expectation right now from the government's side is they can get this from the markets, and it seems when we talk to market participants...(that) they might be able to get that type of money."

Non-performing loans also continue to weigh heavily on bank balance sheets, in particular in Kazakhstan, virtually all southeastern European countries, Ukraine, Slovenia and Hungary.

A withdrawal by western banks from the region had slowed, but was still a concern, Berglof said.

"Deleveraging we expect will continue for several years more."