April 29, 2014 / 1:50 PM / in 4 years

UPDATE 1-EBRD head: New regional growth forecasts will not be good news

(Adds detail, quotes, background, combines stories)

By Marc Jones

LONDON, April 29 (Reuters) - New growth forecasts for emerging Europe and North Africa due next week from development bank the EBRD will “not be good news”, the bank’s president said on Tuesday, warning that Ukraine is facing a severe recession.

The EBRD (European Bank for Reconstruction and Development) is putting the finishing touches on the new projections but like the International Monetary Fund, which on Tuesday warned of the “unusual constellation” of risks in the region, it is set to paint a gloomier picture.

“It is no secret that it is not going to be very good news,” Suma Chakrabarti, president of the bank, said during a speech at a financial event.

Back in January the EBRD, the development bank set up in 1991 after the fall of the Berlin Wall, forecast growth of 2.7 percent this year for its region of operation which has been extended from the former Communist-bloc countries of eastern Europe to Turkey, Egypt, Morocco, Tunisia, Jordan and Mongolia.

Investors are likely to focus on the EBRD’s forecast for Russia’s economy which it predicted in January would expand by 2.5 percent in 2014.

Aasim Husain, the deputy head of the IMF’s European department, said its Russia’s growth outlook - which is roughly half of the EBRD’s at 1.3 percent - was “almost certain” to be cut again this week.

The rising tensions between the West and Russia over Ukraine are threatening to cancel out the economic uplift coming from the euro zone as it recovers from its debt crisis.

Chakrabarti said Ukraine’s economy, which has been left battered by the unrest was now “almost certain” to slump into a “severe recession”.

“The key is to get Ukraine’s economy off the floor,” he said, adding the EBRD had committed to spend around a billion euros there this year and expected the IMF to approve a $17 billion aid programme for the country on Wednesday.

The EBRD’s main shareholders are the G7 countries like the United States, Britain, Germany and Japan that have started to impose sanctions on Russia for its land grab of Crimea.

The EBRD currently has around 9.7 billion euros invested in Russia. Bank insiders say that while cutting that due to the Ukraine crisis would send a political signal, the fact the money is mostly spent on private-sector projects means such a move would have little real impact on the Russian government.

TOUGHER STANCE

The failure to make a difference in Ukraine and disappointments that past successes in eastern Europe have not been sustained has also led Chakrabarti to rethink the EBRD’s strategy, he said.

Chakrabarti, who took the helm of the EBRD in 2012, said the development bank would lay out new plans at its annual meeting next month to take a tougher approach with reform-shy governments to try and force them into action.

“We at the EBRD have come to the conclusion that we need to be at the forefront in our relationship with governments in our region to push the cause of structural reform more strongly than (has) perhaps been done in the past 10 years,” he said.

“We have a responsibility and a challenge to face up to the reform process, which is why in our medium-term strategy which is to be approved by our governors in a few weeks’ time in Warsaw, it’s all about re-adjusting transition.”

In his speech at the event organised by think-tank the Official Monetary and Financial Institutions Forum, he mentioned Hungary and Bulgaria as countries where energy reforms had stalled, adding that privatisations had stumbled in Russia, Kazakhstan and Ukraine. (Reporting by Marc Jones; Editing by Sujata Rao and Pravin Char)

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