Conflict, high borrowing costs clip growth in EBRD regions, report says

[May 15, 2024]  By Libby George
 
LONDON (Reuters) - Two wars and high borrowing costs have trimmed expected growth in countries covered by the European Bank for Reconstruction and Development (EBRD), the bank said in a semi-annual report released on Wednesday.  

People walk past the new headquarters of the European Bank for Reconstruction and Development (EBRD) in Canary Wharf, London, Britain, September 14, 2023. REUTERS/Alishia Abodunde

The EBRD, which covers economic trends across emerging Europe, central Asia, the Middle East and Africa, still expects economic growth of 3% across the 40 or so countries it covers, above 2.5% in 2023.

But that forecast is 0.2 percentage points lower than in its September report.

"This year is going to be better. But of course there is a lot of uncertainty," EBRD Chief Economist Beata Javorcik told Reuters.

"The sad news is that our countries of operation are now affected by a fallout of not one, but two wars: the war in Ukraine and the war in Gaza."

The downward revision is due in part to slower-than-expected growth in central Europe and the Baltic states, a knock-on effect from Germany's weak growth.

Gaza spillovers and slowing reform progress in Egypt are also hindering economic expansion in the southern and eastern Mediterranean, the EBRD said, lowering projected growth there to 3.4% in 2024 and 3.9% in 2025.

Egypt's Suez Canal revenue has fallen, while a drop in tourism to Lebanon and Jordan "may prove lasting", the bank said.

Meanwhile, geopolitical shifts are impacting investment flows, with China's share of foreign direct investment into EBRD regions spiking to 39% in 2023 from less than 10% in 2022 - with Egypt, Morocco and Serbia benefiting.

BRIGHT SPOTS, DISAPPEARING PEACE DIVIDEND

Javorcik said Poland and Croatia stood out, with growth expected to accelerate in both to 2.9% in 2024 as inflation moderates and Croatia's tourism revenues jumps 40% from pre-COVID levels.

But high borrowing costs are making growth tough; the median yield on 5-year government bonds in the EBRD region increased by three percentage points between early February 2022 and early April 2024.

Fallout from the war in Ukraine is also straining budgets through rising defence spending.

"We see the peace dividend essentially disappearing as countries are planning and spending more on defense," Javorcik said.

(Reporting by Libby George; Editing by Karin Strohecker and Mark Potter)

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