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South-Eastern Europe Economic Review - May 2014

Good prospects but return to potential growth still elusive

In the current issue of our SEE&Egypt Economic Review, we elaborate on our forecasts regarding the macroeconomic performance of the economies we follow, namely Albania, Bulgaria, Cyprus, Romania, Serbia, Egypt and Ukraine. With the exceptions of Ukraine and Egypt which – despite their enormous long-term potential – face acute geopolitical risks and Cyprus, which is showing signs of exceptional compliance with its Economic Adjustment Programme, all countries in the region are expected to register solid growth rates. Nevertheless, the transition to a new growth model – one that is not based on consumption, but on investment and exports – is proving rather challenging, limiting growth to levels substantially below their potential. As a result, economic performance has failed to reach its pre-crisis levels, depressing employment and disposable income. One side effect of depressed consumption was the extreme reliance on the agricultural sector and its weather-related volatility and exports – mainly to the EU. Subdued domestic demand also affected the local banking sectors, keeping deposits low, credit expansion negative and NPLs high.

Cyprus is a special case, where the implementation of the Economic Adjustment Programme and the restructuring of its banking system will keep the economy in recession throughout 2014. Nevertheless, it has to be noted that the Eurogroup welcomed the conclusion of the troika’s third review of Cyprus’s economic programme, noting that the country’s programme remains on track, due to better than expected macroeconomic and fiscal performances. In addition, the ongoing stabilization of the financial sector in Cyprus will pave the way for the second phase of the gradual relaxation of the temporary restrictive measures on transactions.

Finally, Egypt and Ukraine are special cases in so far as the domestic and regional geopolitical environment remains fluid and nebulous. However, we believe that even in these cases there exist stabilizing factors that have the potential to provide a sizable safety cushion. Egypt has been the beneficiary of USD 15bn. of funds and grants from the Arab world, while Ukraine recently arranged for USD 17bn. of funding from the IMF.


Ilias Lekkos
Group Chief Economist