*EPF503 04/13/01
Text: World Bank Report on Developing and Transition Economies in 2000
(Recovery posted in Europe, Russia, Central Asia) (1410)

Developing and transition economies in Europe and the Commonwealth of Independent States profited from "buoyant" conditions throughout the region last year and posted strong economic recoveries, according to a World Bank report issued April 10.

The report -- Global Development Finance 2001 -- cites improved macroeconomic conditions, increased exports, reduced political tensions, and greater investor confidence as some of the reasons for significantly higher growth rates in 2000 compared to 1999.

The report discusses external debt indicators and aggregate resource flows and their effects on the recovery, as well as prospects and risks for the future. It is available online at http://www.worldbank.org/prospects/gdf2000

Following is the text of a news release summarizing the World Bank report:

[In the text, 1 billion = 1,000 million.]

(begin text)

World Bank
Washington, D.C.
www.worldbank.org
News Release No: 2001/289/ECA
April 10, 2001

EUROPE AND CENTRAL ASIA REGION POSTS STRONG RECOVERY SAYS NEW WORLD BANK REPORT

WASHINGTON, April 10, 2001 - Output in Europe and Central Asia posted a strong recovery of 5.6 percent in 2000, according to a new World Bank report released today. Buoyant economic conditions were prevalent throughout the region, despite widely varying economic structures and stages of transition.

Global Development Finance 2001, the Bank's yearly report on external financing prospects for developing and transition countries also says that Central and Eastern European countries (CEE) benefited from increased exports to the European Union and experienced a growth rate of 4.6 percent, following a contraction of 0.3 percent in 1999.

The Commonwealth of Independent States (CIS) posted growth of 6.8 percent, up from 2.6 percent in 1999. In the Russian Federation and some of the Caucasus and Central Asia, higher oil prices allowed for increased fiscal outlays and investment, especially through the pay-down of arrears and a shift to cash payments. Domestic demand in Russia also continued to benefit from ongoing import substitution spurred by the 1998 devaluation, as the ruble remains below the pre-crisis level, although the 22 percent appreciation of the real effective exchange rate since the crisis has reduced this impetus.

Since Russia is the region's largest economy, its recovery was also key to generating stronger external demand for other economies in the region, especially those of the CIS, the Baltics, and Turkey.

With improved macroeconomic conditions and easing of political tensions, investor confidence in the region increased during 2000. Credit ratings improved, with upgrades instituted for Bulgaria, Hungary, and Poland, for example.

Late in 2000, Turkey's economy experienced a banking sector crisis, induced in large part by mismatches in 2002, driven largely by export growth and a restoration of investor confidence tied to improved policy performance. Confidence in Turkey had improved early in 2000, prompted by the initiation in January of the three-year IMF stabilization program, which was centered on the crawling peg regime. However, late in the year, because of both internal and external factors, confidence weakened when rapid deterioration in the current account balance and delays in the privatization program, along with growing banking sector imbalances, induced some investors to cash their Turkish holdings.

External debt indicators

The ECA region's long-term external debt declined marginally to $387 billion in 2000, down from $391 billion in 1999. Public and publicly guaranteed debt fully accounted for the decline, as it contracted by close to $4 billion to $292.2 billion in 2000, while private non-guaranteed debt remained flat at $94.7 billion. Short-term debt increased 4 percent in 2000 to $74.4 billion.

Overall, debt indicators improved significantly during 2000 relative to the sharp deterioration witnessed in 1998 and to the more moderate decline in 1999. The improvement in 2000 for the region as a whole largely reflects a flattening of the debt stock and strong export growth.

The debt-to-export ratio improved markedly, down to 114 percent in 2000 from 144 percent in 1999. Similarly, the debt-service ratio improved from 18 percent in 1999 to 14.6 percent in 2000.

Aggregate resource flows

Estimates for 2000 suggest that net long-term capital flows to the ECA region increased marginally, from $52.5 billion in 1999 to $54.8 billion. This represents a broad stabilization of flows following the sharp 20 percent contraction of 1999, influenced by the Russian financial crisis. The moderate net upturn in 2000 is due to both external and internal factors. Higher international interest rates early in the year tended to draw capital away from emerging markets, including those in ECA, while improved export performance within the region contributed to reducing demand for foreign finance in many countries.

The $2.3 billion increase in aggregate capital flows reflects a $2 billion rise in private flows over 1999 to $45.2 billion. Portfolio equity flows and FDI each posted close to $2 billion in net inflow, largely offsetting a decline in bank lending, as lenders remained reluctant to increase their exposure to Russia.

While private capital flows declined over the year, official flows increased slightly from $9.3 billion in 1999 to $9.6 billion in 2000. The 3 percent increase for the year represents a significant easing from the 30 percent rise witnessed during 1999, a spike due to official rescue packages. Most of the official flows were composed of concessional financing ($8.3 billion, 86 percent). Of the $1.3 billion in non-concessional financing, multilateral lending accounted for close to $2 billion, with net bilateral lending falling to negative.

The normalization of Russia's relationship with commercial creditors (the February 2000 London Club agreement) and Ukraine's restructuring of its external debt into a new seven-year eurobond in February 2000, also improved investors' confidence. Early in 2001 Russian negotiators returned to the table with Paris Club creditors. After holding out for debt forgiveness on Soviet-era debt, Russia appears committed to reaching an agreement with Germany, which holds the bulk of Soviet-era debt and is key to finalizing an agreement with the Paris Club.

Prospects and risks

Growth in the ECA region is expected to slow notably from 5.6 percent in 2000 to 2.3 percent in 2001, reflecting a downshift in external demand, effects of stabilization and structural reform programs, the impact of policy tightening to avoid overheating (e.g., Poland, until early 2001), and the financial crisis in Turkey (the region's second-largest economy).

For hydrocarbon exporters, growth is not expected to slow substantially until 2002, as some of the impacts of high investment and government spending should largely sustain growth through 2001. A number of other countries in the ECA region will have difficulty containing fiscal and external imbalances, posing some downside risks to the forecast. Pressures on fiscal balances include large public sectors, overextended social security systems, significant off-budget expenditures, forthcoming general elections, and ongoing adjustment costs related to the EU accession process. Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, Slovenia, and Turkey are seeking EU membership.

While current account deficits generally improved over 2000, they remain high in many countries. If counterbalancing surpluses in capital accounts -- due often to privatization-linked FDI inflows -- decline rapidly, it could undermine external stability.

Aggregate growth in the ECA region is forecast to stabilize at close to 4 percent in 2002 and 2003, in part because of the anticipated revival of growth in Turkey. For countries seeking accession to the EU (almost all of the CEE) deepening reforms and FDI, in addition to expected steady external demand, should provide continued strong impetus to growth. Greater geopolitical stability in the Balkans, following political changes in the Federal Republic of Yugoslavia (Serbia/Montenegro), should also translate into improved growth prospects for the region.

Growth for the CEE countries is forecast to average 4.8 percent in 2003. Further to the east, the outlook is more clouded with significant risks to the forecast on both the upside and downside, mainly because of the uncertainty in global oil markets and greater prominence of political factors. Growth in the CIS is projected to slow to 3.2 percent on average by 2003.

The full text of the report, its press release, and other materials will be available to the public on the World Wide Web immediately after the embargo expires at: http://www.worldbank.org/prospects/gdf2000

Media outlets are encouraged to include this Web address in their coverage of the report.

1/Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, Slovenia, and Turkey are seeking EU membership.

Contact Person: Phil Hay (202) 473-1796 [email protected] Stevan Jackson (202) 458-5054 [email protected] Cynthia Case McMahon (TV/Radio) (202) 473-2243 [email protected]

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
NNNN