EBRD cuts Turkey outlook, but sees improving euro zone steadying region

LONDON Tue Jan 21, 2014 4:30am EST

LONDON Jan 21 (Reuters) - The European Bank for Reconstruction and Development cut its economic growth projections for Turkey on Tuesday but otherwise barely trimmed its overall view for its regional emerging markets.

The EBRD, which monitors central and eastern European and some of Europe's neighbours in Asia and North Africa, trimmed 0.1 percentage points off its 2014 forecast for the overall bloc to leave it at a relatively unspectacular 2.7 percent.

It said the improved situation in the euro zone, a driver for much of its region, should help counterbalance rising pressures elsewhere.

Political tensions meant Turkey took the biggest hit, with a downward revision of 0.3 percentage points to 3.3 percent, while the brighter euro zone outlook meant Poland saw one of the largest upgrades as it climbed to 2.7 percent.

A corruption inquiry has triggered a sharp response from the government in Turkey, which has dismissed hundreds of police officers and raised concern about a roll-back of reforms meant to strengthen independence of the judiciary.

This has added to broader investor concerns about the impact of the U.S. Federal Reserve trimming its monetary stimulus, a lot of which found its way to emerging markets.

"As the recovery takes hold and U.S. monetary policy is gradually tightened, emerging markets are likely to continue receiving lower inflows of capital," the EBRD said.

"The (overall) revision is largely driven by lower growth expectations for Turkey, mostly offset by expectations of a quicker recovery in the Central Europe and Baltics region," it said.

The report also highlighted rising levels of bad loans in banking systems in Slovenia, Hungary and most of south eastern Europe as dragging back economies, along with broader bank deleveraging.

"There are increasingly positive signs in the world economy, especially in the most advanced countries. But the EBRD's own region is not yet out of the woods," its chief economist Erik Berglof added.

(For full forecasts please click here) (Reporting by Marc Jones)

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