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Publicatio​n in SEE - April 2013

As always in our first SEE & Egypt review of the year, we try to look ahead and present our assessment of the short-to-medium term prospects for the region. Despite the fact that the economies we follow comprise a fairly inhomogeneous group, we are able to identify two main themes that will dominate developments throughout 2013. The first theme, which defines the outlook in Albania, Bulgaria and Romania, is that of Euroarea (EA) weakness. The economic ties of these three countries to the EA are especially strong, either through remittances, as is the case in Albania, or through trade, investment and banking, as is the case in Bulgaria and Romania. For this reason, we believe that the ongoing weakness and stagnation in the EA will substantially reduce the potential economic growth in these countries.

The other main theme, which mainly affects Ukraine and Egypt, is that of FX reserves adequacy and these countries’ ability to finance maturing debt and pay for imports in foreign currency. Because of political indecision or social unrest these two economies have seen their FX reserves decline to levels that make us feel uncomfortable. At the same time, a lack of progress with the IMF increases uncertainty further and discourages other institutional funding.

Serbia sits somewhere between these two groups, as it too is affected by the EA crisis, but also has its own problems attracting FX funding and concluding its negotiations with the IMF.

And finally there is Cyprus. In the case of Cyprus, we hope for the best, but fear the worst. Given the unprecedented nature of developments in Cyprus, it’s very difficult even to attempt to simulate any macroeconomic scenario. As an alternative, we have decided to use the Baltic crisis of 2009 as a template for our Cyprus outlook. The similarities between the Baltic and Cypriot economies are not limited to their small size. The Baltic economies were almost completely euroised which limited their ability to use monetary policy at will, while their banking sectors were also facing solvency issues due to inadequate credit policies. To the extent that this analogy is valid, the outlook for Cyprus is bleak. In this adverse scenario, we expect a substantial contraction of close to 15% of GDP in 2013, while unemployment could increase to 18%-19%.

ILIAS LEKKOS
Director, Economic Analysis & Markets Division