REFILE-European development bank cuts growth forecast for emerging economies

Fri May 10, 2013 5:35am EDT

(Refiles to clarify that the embargo on this story has been lifted after being broken)

By Sujata Rao

LONDON May 9 (Reuters) - Europe's development bank slashed its 2013 growth forecasts for emerging Europe and North Africa on Friday by almost a full percentage point, saying a sharp slowdown in Russia would drag down the regional economy.

The European Bank for Reconstruction and Development (EBRD) said Russia's problems should galvanise the region to pull down barriers to new businesses and investment.

The bank, originally set up to help Europe's ex-communist states, cut its 2013 average growth forecast for all the countries in which it now operates to 2.2 percent, down from last year's 2.6 percent.

"Russia's slowdown is becoming a new source of weakness in the region," the EBRD said at its annual summit in Istanbul.

The meeting's host country, Turkey, is sustaining an economic boom as its manufacturers tap into export markets beyond Europe.

But the EBRD said what had seemed like a temporary weakening in Russia was in fact a trend slowdown, fuelled by a fall in global prices for its commodity exports and by lower post-election social spending.

This was a "wakeup call across the region to re-energise structural reforms that have been on hold since the start of the crisis," said EBRD Chief Economist Erik Berglof.

Seeing euro zone risks abating, the EBRD had predicted growth of 3.1 percent this year in a January forecast for its region, which now includes some North African countries.

But it said on Friday that any return of confidence was being offset by a slowdown in two of the region's biggest economies - Russia and Poland.

Russia's economy would grow just 1.8 percent in 2013, it said - barely half the 3.5 percent it had forecast in January and last year's 3.4 percent. Growth could pick up to 3.2 percent next year, but there was "no quick turnaround in sight."

Poland, the only European Union country to escape recession after the 2008 crisis, will grow 1.2 percent this year, slowing from last year's 1.9 percent. The broader central European region is expected to grow just 0.8 percent, the EBRD said, trimming its January forecast of 1.2 percent.

Slovenia, Hungary and Croatia are seen stuck in recession, with Slovenia's economy contracting 2.5 percent as it tries to resolve its banks' bad debts without seeking international aid.

In the EBRD's new states, Jordan, Morocco, Tunisia and Egypt, termed SEMED (southern and eastern Mediterranean), Berglof said reducing subsidies would be key to cutting large fiscal deficits.

The growth slowdown is also gripping the countries which joined the EBRD after the 2011 Arab Spring overthrow of dictators in Egypt, Libya and Tunisia.

The bank predicts these economies to grow 3 percent in 2013 - on par with 2012 but a full percentage point below January forecasts. It sees Egypt, mired in political turmoil, growing 2 percent - way below the level needed to get more people into work - versus the 3.8 percent previously forecast.

Egypt "has exhausted almost all available policy space and the lack of economic consensus has prevented the enacting of much needed economic reforms," it said. Standard & Poor's cut Egypt's credit rating to C, deep in junk territory, on Thursday.

But some commodity producers in the EBRD's sphere are booming. Mining in Mongolia is forecast to generate 16 percent growth this year, accelerating to 17 percent in 2014, and Turkmenistan's gas will bring 10 percent growth. (Reporting by Sujata Rao; Editing by Ruth Pitchford)

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