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32 I Central Europe bne December 2017
Non-performing loans, % of total
a forecast that is below those of some of the other International Financial Institu- tions (IFIs) and local investment banks.
“The increase in the oil price – com- pared with 2016 – has been a positive factor for Russia, and also for other commodity exporters and countries in Central Asia and Eastern Europe and the Caucasus that rely on Russia for remittance flows or as a destination for their exports,” the EBRD said. The gap in growth rates between the east and west of the EBRD region was now expected to narrow further, it added.
Central Europe
After a slowdown in 2016 linked to lower investment levels, growth in Central Europe and the Baltic states is expected to accelerate to close to 4% in 2017, before moderating to around 3.5% in 2018, the EBRD report found.
Growth in Central Europe has been so fast that several countries are starting
to run up against structural constraints, with rising wage costs and tightening labour markets being the most significant amongst them. Wages have grown at such a quick rate that some international investors are beginning to talk about going home as the competitive advan- tages these countries used to offer are being eaten away and unions are becom- ing more demanding when it comes to workers' rights and privileges. At the same time the appeal of the lower cost Southern European countries is increas-
Source: CEIC, national authorities. World Bank, Moody's
views of the medium-term growth potential of the region’s economies and reflecting a number of country- specific factors. Still, even this forecast represents an upward revision of 0.2 percentage points on the May fore- cast. Notwithstanding this accelera- tion, the average growth in the region is expected to remain slightly below that of emerging markets elsewhere with comparable per capita incomes.
Eastern Europe
While the economies of Central Europe are reaping the benefits of over two decades of reforms and institu- tion building to reach a critical mass, those of Eastern Europe are doing less well, stymied as they are by the need to make deep structural reforms.
Russia remains an “investment node” for most of the region and especially for the countries to the south and east of
it. Russia’s fate has a direct impact on remittances sent home by migrant work- ers and hence the economies of some
of the smaller and poorer countries.
Remittances from Russia to Central Asia, Moldova and the Caucasus stabilised in US dollar terms towards end-2016 as the Russian economy returned to growth and the ruble appreciated in line with oil prices. Remittances rebounded by 21% y/y in the first half of 2017 but remained around 50% of the value recorded four
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years earlier. In local currency terms, remittances are only 9 percentage points below their peak levels of 2013 reflect- ing cumulative depreciations in recipient countries in recent years.
Russia is the largest of the EBRD countries and its gathering economic recovery, though restrained, has had a spillover effect on its neighbours, most noticeably in Belarus.
“Russia has now pulled out of reces- sion after a cumulative contraction of 3% over the last two years. Russia is expected to see GDP growth of 1.8 and 1.7% in 2017 and 2018, respectively,” the development bank predicted, giving
Remittances from Russia to EEC/CA, inflation-adj.