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Worst may be over for Russia, risks rising in central Europe: IMF

LONDON (Reuters) - The worst of the economic slump in Russia may be over the International Monetary Fund said on Friday, but warned possible euro zone stagnation and shifting politics made central Europe’s prospects increasingly uncertain.

A participant attends a session at the congress of foreign currency mortgage holders in Moscow, Russia, April 6, 2016. REUTERS/Maxim Shemetov

The IMF’s twice-yearly regional outlook for Central, Eastern and Southeastern Europe (CESEE) said the rise of populist parties in some countries as well as limp global growth and aging populations were all aggravating the strains.

Using forecasts produced last month, it said growth in the central channel from Poland down to Turkey would remain as healthy as 3-4 percent this year, whereas Russia and most of its former Soviet neighbors would stay in recession.

But it is likely to be a period where the balance shifts, with the former group likely to see a slight slowdown going into next year and Russia et al perking up with a return to growth.

“Although there is a strong cyclical rebound in CESEE countries, risks have increased,” the IMF said.

“The strongest break on CESEE growth would be a stagnation in the euro zone, the largest trading partner for many CESEE countries.”

Mahmood Pradhan, the deputy head of the Fund’s European department, said the euro zone economy grinding to a halt wasn’t the base-case scenario after its slightly better than expected start to the year, but that it remained “a clear risk”.

He said the IMF’s economists were also looking into how much of a negative impact there would be if restrictions were put on the EU’s borderless travel arrangement, Schengen, to try and control the flood of Syrian and other refugees.

“With these higher risks, supportive monetary policy combined with medium-term fiscal consolidation remains valid policy advice for many economies in the region,” the report added.

Pradhan also gave the Fund’s first public thumbs up to Ukraine’s new government, saying early noises that it plans to stick to reform efforts were “very encouraging”.

For experts though the big question for the CESEE region is whether the last quarter of century of convergence towards Western living standards and free-market politics is beginning to reverse as the scars of the financial crisis and regional spats struggle to heal.

Poland’s government for example has been vocal in its criticism of some of the EU actions since it came into power last year.

It is also going against economic grain in a similar way Hungary has in recent years, proposing to cut the country’s retirement age, increase child benefit payments and make banks swallow costly Swiss franc loans they sold in the past.

“The region faces more pronounced downside risks,” said Anna Ilyina chief of the IMF’s emerging economies division, who pointed to Turkey as another country where political uncertainty had increased.

“If this slower growth is to become the new normal then convergence to income levels of advanced Europe is going to be much, much slower.”

Reporting by Marc Jones; Editing by Sandra Maler