(Adds figures from report)
By Adam Jasser
WARSAW, April 23 (Reuters) - The global slowdown will put
the brakes on central and eastern Europe's rapid economic growth
this year but the region will continue catching up with the
richer West, the IMF said on Wednesday.
The expansion in developing Europe should decelerate to 5.5
percent in 2008 and 5.2 percent in 2009, from 6.9 percent last
year, with the biggest jolts coming as stars Slovakia and Latvia
drop from double digit growth to single figures.
The Baltic states should see a soft landing but there is
still some risk of a harsher outcome there and in Romania and
Bulgaria, the Fund said.
Ajai Chopra, deputy head of the IMF's European Department,
said the risks faced by the region were external, and
particularly acute for countries with wide external imbalances.
"Our basic scenario for the Baltics is a soft landing," he
said, but added: "The risk of a hard landing cannot be excluded,
not just in the Baltics but in Romania and Bulgaria too."
Chopra also said euro zone aspirant Slovakia had made good
progress on inflation -- its toughest hurdle for adopting the
single currency next year -- but would need tight fiscal and
wage moderation to keep it on track.
Slovakia has cut inflation below the nominal criteria for
euro entry but European officials have said they are focusing on
its ability to keep price growth at sustainably low levels.
The European Commission will rule on its readiness on May 7.
"FLASHING RED"
Advanced European economies should slow to 1.5 percent
growth this year, from 2.8 percent in 2007.
In a report outlining its European economic outlook, the
Fund said spillovers from the weaker global expansion would
pinch European growth by 1.25 percentage points in 2008.
In developing Europe, growth in the 10 new mostly
ex-communist EU newcomers was seen slipping to 4.6 percent this
year and 4.3 percent in 2008, versus 6.2 percent last year.
Latvia was seen going to 3.6 percent this year from 10.2 in
2007 and Slovakia to 6.6 from 10.4. Only laggard Hungary was
seen accelerating to 1.8 percent this year from 1.3 percent.
But unlike in western Europe, where the Fund advocated
policymakers eventually ease rates to shore up growth, Chopra
advocated tighter policy in emerging Europe to staunch the
domestic demand that could put those economies at risk.
"Some current account gaps should be flashing red for
policymakers," he said. "Fiscal policy should be used more to
tackle demand."
Romania, Bulgaria, Estonia, Latvia and Lithuania have seen
their current account deficits balloon over the last decade as
their consumers use higher wages to buy foreign-made goods and
firms import equipment to produce goods.
The Baltic countries have a relatively low level of
investment going into tradeable goods production compared to the
leading economies in the region, such as Poland and Slovakia.
The gaps make them vulnerable in swift slowdowns, especially
if foreign direct investment, which offsets the deficits more
than exports, slows due to tighter global liquidity.
Christoph Rosenberg, the IMF's regional senior
representative, said those countries were witnessing a "halo
effect" linked to their joining the European Union since 2004
that may help them avoid pain in serious market turbulence.
"Countries in the region can get away with high imbalances
thanks to EU membership," he said, adding that bond spreads of
the EU newcomers were 100-200 basis points lower than those of
comparable emerging markets.
Rosenberg also said the currencies of Poland, Hungary,
Slovakia and the Czech Republic should continue to appreciate in
real terms despite the global economic slowdown due to the
convergence effect.
(Reporting by Adam Jasser; Writing by Michael Winfrey; Editing
by Chris Pizzey)
