DEAD SEA RESORT, Jordan/LONDON (Reuters) - The European Bank for Reconstruction and Development (EBRD) nudged up growth forecasts for its near 40-country region on Wednesday, but cautioned that growth may have peaked and the dollar’s growing strength could bring problems.
The EBRD, which tracks trends in 37 countries across three continents from Morocco to Mongolia, also said the collapse of the Iran nuclear deal could drive up oil prices and that Turkey’s economy — its biggest lending market — was flashing warning signs.
Its forecasts pointed to growth this year in every economy it covers. Average growth is now seen at 3.3 percent, an upward revision of 0.3 percentage points from its November forecast, and an expansion of 3.2 percent in 2019.
However, this represented a slowdown from last year’s 3.8 percent, demonstrating that most economies have pulled their main growth levers and that productivity growth rates are expected to ease as populations age.
“We forecast that this year will be better than we expected and next year will be like this year,” EBRD Chief Economist Sergei Guriev told reporters at the bank’s annual meeting.
“(But) in order to develop new sources of growth, these countries need to carry out structural reforms of product, capital and labor markets,” he said, adding that governance, integration into the global economy and sustainable infrastructure were also widely needed.
Outlining risks to its forecasts, the EBRD cited a substantial rise in corporate debt levels, which could be particularly dangerous for governments and firms — as is the case in many emerging economies — that borrow in dollars.
Corporate debt as a percentage of gross domestic product in the EBRD regions increased to more than 60 percent in 2018 from around 40 percent in 2007, much of it external and denominated in foreign currency, the bank said.
“If your debt is in foreign currency and your own currency becomes weaker, suddenly your debt-to-GDP ratio goes up, and not by just a percent or two but maybe by 10 percentage points of GDP,” said Guriev.
He stressed, though, that he did not currently expect the situation to escalate into a full-blown set of currency crises.
Even in Turkey, where the strains of high foreign currency borrowing and rising inflation have been most obvious and have sent the lira to all-time lows, the fundamentals were still strong.
“Actually a very important part of the solid fundamentals of the Turkish economy is that the lira is flexible and therefore helps to adjust and restore the competitiveness of the economy,” Guriev said.
For the overall EBRD bloc, “the baseline is quite optimistic and if policy responses are reasonable then we don’t foresee a major currency crisis,” Guriev added.
Policymakers’ limited room for maneuver, a further rise in populist political parties and security as well as ongoing geopolitical risks are also still in the background.
With constrained fiscal space and very accommodative monetary policy, governments may have limited ammunition to respond to a major dip in market confidence.
“We assume countries will manage their problems in a responsible way but things may change,” Guriev said.
“If interest rates suddenly go up in advanced economies... some of the debt that used to be sustainable becomes less sustainable.”
Reporting by Karin Strohecker; Editing by Gareth Jones