May 8, 2013 / 12:35 PM / 4 years ago

Slow western growth, geopolitical risks haunt emerging Europe

LONDON, May 8 (Reuters) - Stuck between sluggish economies in the west and rising geopolitical risks in the Middle East, emerging European countries are struggling to attract investment and boost growth.

The European Bank for Reconstruction and Development will discuss ways of "Innovating for Growth" at its annual meeting this weekend in Istanbul - seen as the cornerstone of its region of operation of central and eastern Europe and North Africa.

While western powers argue about whether growth or austerity measures are the best way to galvanise their economies, many emerging European countries remain too dependent on exports to these markets, particularly in the debt-racked euro zone.

The EBRD lent around 9 billion euros ($12 billion) in emerging Europe last year, mainly in private sector investment.

"It's a question of how to help these regions power ahead with growth at a time when developed markets are going to provide minimal or negative support," said Peter Attard Montalto, emerging market economist at Nomura.

The EBRD in January forecast growth of 3.1 percent in its region this year. It will publish new forecasts at the meeting.

Growth compares well with many developed world economies, but is not enough to alleviate high unemployment.

"Western Europe remains the anchor," EBRD president Suma Chakrabarti told Reuters in a recent interview.

"The question is whether 2014 will be a new start. We thought western Europe would be in a better shape by then - (the recovery) might be slightly more delayed."

The EBRD says easy access to money via international capital markets may be delaying the overhaul it advocates in countries such as Hungary and Ukraine in areas like tax and bureaucracy. Both countries were able to raise dollar funding this year.

It has also been alert to the risk of a disorderly withdrawal of funds by cash-strapped western European banks from Eastern Europe's banking sector.

The EBRD-led Vienna Initiative said in its latest report that funding losses were "petering out" in some countries, but others such as Hungary and Slovenia still faced risks.

"Even though the risk of disorderly deleveraging ... appears to have been averted, the task to put in place credit conditions that can underpin a strong recovery and convergence with the West remains," the group said.

The EBRD was set up in 1991 to help the countries of the former Soviet Union develop market economies but has gradually extended its reach, most recently to North Africa.

Lending to the Bank's newest countries of operation - Egypt, Jordan, Morocco and Tunisia - has so far been slow, hampered by internal political issues with Egypt, for example, increasing the influence of the Muslim Brotherhood over government in a cabinet reshuffle this week.

"The EBRD cannot move more rapidly than the overall macro picture," Florence Eid, chief executive of research and advisory firm Arabia Monitor, told a conference call this week.

Eid also pointed to rising political risk across the Middle East, particularly after Israeli air strikes near Damascus and the possible use of chemical weapons by both the Syrian government and rebel forces.

"This is one of the more acute versions of (political risk) in recent years," she said.

"That is bound to spill over into asset classes eventually."

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