World Bank: Bulgaria at High Risk over Europe Debt Crisis

Finance | June 10, 2010, Thursday // 16:12|  views

The recovery in real GDP in Europe and Central Asia in 2010 is projected by the World Bank at 4.1% percent in 2010. File photo

The World Bank revised its global economic recovery forecast over Europe’s debt crisis creating new hurdles on the road to sustainable medium term growth, according to its latest Global Economic Prospects 2010, released Wednesday.

The report points out that risks are higher in Eastern Europe with Albania, Bulgaria, Romania, and Serbia listed as countries most endangered by the debt problem.

The World Bank projects global Gross Domestic Product (GDP) to expand between 2.9% and 3.3% in 2010 and 2011, strengthening to between 3.2% and 3.5% in 2012, reversing the 2.1% decline in 2009. Developing economies are expected to grow between 5.7% and 6.2% each year from 2010-2012. High-income countries, however, are projected to grow by between 2.1% and 2.3% percent in 2010—not enough to undo the 3.3 percent contraction in 2009—followed by between 1.9% and 2.4% growth in 2011.

According to the World Bank experts, the recovery faces several important headwinds over the medium term, including reduced international capital flows, high unemployment, and spare capacity. While the impact of the European debt crisis has so far been contained, prolonged rising sovereign debt could make credit more expensive and curtail investment and growth in developing countries, the report notes.

On the upside, world merchandise trade has rebounded sharply and is expected to increase by about 21 % in 2010, before growth rates taper down to around 8% in 2011-2012 with half of the rise in global demand in 2010-2012 coming from developing countries.

The World Bank’s projections assume that efforts by the IMF and European institutions will stave off a default or major European sovereign debt restructuring. But even so, developing countries and regions with close trade and financial connections to highly-indebted high-income countries may feel serious ripple effects.

Regardless of how the debt situation in high-income Europe evolves, a second round financial crisis cannot be ruled out in certain countries of developing Europe and Central Asia, where rising non-performing loans, due to slow recovery and significant levels of short-term debt, may threaten banking-sector solvency, the report warns.

According to the World Bank, countries such as Albania, Bulgaria, Romania, and Serbia, whose financial sectors are closely linked to these of highly indebted countries, and whose economies have benefited in the past from heavy capital inflows from Greek financial institutions, are at higher risk.

Countries such as Bulgaria, Latvia, Lithuania, which faced the crisis with unsustainable domestic booms - characterized by large current account deficits are expected to recover more slowly, due to limited room for policy maneuver, the experts explain.

After an estimated 5.3% contraction in economic activity in 2009—the sharpest slowdown of any region—the recovery in real GDP in Europe and Central Asia in 2010 is projected at 4.1% percent in 2010 - still 3.2% slower than the region’s pre-crisis five-year average, and largely reflecting the strong growth rebound in the region’s two largest economies - Russia and Turkey, which account for 62% of regional GDP and are projected to grow at 4.5% and 6.3%, respectively. Regional growth has been held back relative to other regions because of the intense domestic adjustments that some countries have had to undergo as a consequence of their dependence on debt-creating flows and associated large current account imbalances with which they entered the crisis. Heightened uncertainty has also created additional headwinds for developing Europe and Central Asia, including weakened external demand for its exports as high-income Europe tightens fiscal policy to reduce its debt burden.

The drying up of capital flows to the region has forced large-scale cutbacks in spending. Overall, net private inflows to the region declined by more than two-thirds, and net debt flows (international bank and bond-lending) were decimated, falling from USD 153.8 B to an estimated USD 13.7 B billion between 2008 and 2009.

According to World Bank experts, over the fall in global export demand, most of the adjustment came through reduced imports. Domestic demand fell sharply and private consumption went down as well. Within Europe and Central Asia, the macro-impacts of the crisis were most severe for those with large current account deficits and vulnerable external debt dynamics at the onset, including Bulgaria, Latvia, Lithuania, and Ukraine.

The impact of the crisis was exacerbated by falling remittances, which in aggregate fell by an estimated 20% in 2009 for the region as a whole, the sharpest fall of any developing region, the report shows.

The contraction in industrial production was more pronounced in smaller countries, particularly those that entered the recession with large current account deficits that were supported by rapid credit expansion financed through debt-creating flows, Bulgaria among them. While industrial production in Bulgaria fell less deeply because of the sharp contraction in domestic demand required as financing of large current accounts dried up, output has not recovered to the same degree and remains at 21%, below pre-crisis peaks.

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Tags: World Bank, Economic Prospects 2010, economic recovery, debt crisis, GDP

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