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South-Eastern Europe Economic Review - February 2015

Below trend growth and low inflation: SEE & Egypt follows in the footsteps of the European core.

The current issue of our SEE Economic Review focuses its attention on the current state of the banking sectors in the major economies of the region, namely Albania, Bulgaria, Romania, Serbia and Cyprus. The main takeaway from our analysis is that the banking sectors in the region are adequately capitalized with sufficient liquidity and decent levels of capital buffers and provisions. Furthermore, local Central Banks and regulators have demonstrated substantial skill and determination in solidifying their local banking institutions throughout the crisis. As a result, the average capital adequacy of the banking systems in SEE countries stood at 18% at end-2013, while Tier I capital reached 16% at the same point.

For yet another year we look into our crystal ball and (with the help of data and statistics) we formulate our outlook for the region of South-Eastern Europe and Egypt. On many occasions in the past we argued for the ability of the EU periphery to decouple from the core European economies and proceed with the project of convergence to the European average. Well, not this year. Despite the fact that we remain positive about all the economies we cover (with the exception of Ukraine, which faces a unique set of challenges), we find it very difficult to envisage a scenario where the region escapes a situation of positive but below-par growth. Low growth does not fulfil people’s aspirations for a quick improvement in their standard of living, but has some positive aspects too. Below-par growth, in conjunction with the global deflationary environment and substantial declines in commodity prices, has led to a significant deceleration in local inflation rates, even in countries with perennially high inflation such as Serbia. In turn, low inflation has allowed central banks to implement aggressive loosening of monetary policy, thus supporting economic growth and easing debt servicing costs. Finally, fiscal policy will remain contractionary in Bulgaria and Cyprus, where deficits will continue to decline, but in all other countries expanding fiscal deficits will continue to support local economic activity..


Ilias Lekkos
Chief Economist