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Eastern Europe and Central Asia are not immune to the turbulence of the ongoing global financial crisis, with most countries in the Region likely to experience slower economic growth, World Bank officials warned on 10 October.
"In this fast moving worldwide crisis, the countries of Eastern Europe and Central Asia are feeling the effects along with the rest of the world," said Shigeo Katsu, World Bank Vice President for Europe and Central Asia, during the World Bank/IMF Annual Meetings.
"Structural reforms in the Region during recent years aimed at establishing strong macroeconomic policies have helped stave off the crisis to a certain extent. These countries are more resilient today than they were 10 years back, but no country is immune from its impact."
Katsu added that a prolonged slowdown in Western Europe would reduce demand for exports from countries in Eastern Europe and Central Asia, particularly those that trade heavily with the 15 original member countries of the European Union. Also, a downturn in Western Europe, as well as Russia, Kazakhstan, and Ukraine, would hit low income economies by slowing migrants’ remittances.
"This money sent back home is second only to foreign direct investment as a source of external finance across the Region, and is the largest source of external finance for a number of low income and lower middle income countries. Also, the impact will be particularly felt by those already affected by the food and energy crisis. Because of this, continued attention should be taken to protect the vulnerable from the impact of elevated food and fuel costs by topping up spending on social assistance."
Pradeep Mitra, Chief Economist for the World Bank’s Europe and Central Asia Region, said that although financial markets have tightened, adjustment has proceeded smoothly so far, outside of a hard, though so far orderly, landing in Estonia and Latvia.
"Inflation is rising throughout the Region, and, fed by rising food prices and domestic demand pressures, is in double digits in the Commonwealth of Independent States (CIS)," Mitra cautioned. "At the same time, domestic credit growth, which had been extraordinarily high, is on a downward trend."
"The message for countries in Eastern Europe and Central Asia is that policy makers need to be prepared to respond quickly to the rapidly changing international financial environment. In the event of a disorderly adjustment brought about by dysfunctional financial markets, the authorities will need to provide liquidity support to address problems of insufficient capital, troubled assets on balance sheets (where this is relevant), and funding difficulties faced by banks. In case of contagion emanating from cross-border banks and cross-border lending, cooperation between home and host supervisory authorities is essential."
According to Mitra, perceptions of risk in countries of the Region, as measured by financial markets, already high in comparative perspective, have increased sharply in some.
"The most serious short-term risk is that shocks in the global financial system will create roll over risks for a number of countries with high current account deficits, and a significant reliance on bank borrowing," he said. "Such re-financing risks are particularly pronounced for those countries that have high ratios of short term debt to reserves."