Prolonged gas cuts during 2015/2016 winter unlikely amidst ward off effects from Ukraine crisis

by Djordje Daskalovich

p 60 OE 23.10 (45)Tom Rogers, Senior Advisor to the EY * Eurozone Economic Forecast

Tom Rogers is currently Senior Advisor to the EY Eurozone Economic Forecast, and Associate Director of Macro Consulting, Oxford Economics. Previously Economic Advisor at HM Treasury and the Foreign and Commonwealth Office.

Do you see the effects of the Russia- Ukraine crisis wearing off in the short-term?

Despite serious concerns at the beginning of the crisis, most of Western and Eastern Europe have weathered the impact of the Russia- Ukraine crisis relatively well so far, as the growth momentum in the Eurozone turned out stronger than the downward pressures from the crisis, caused by recessions in Russia and Ukraine and the sanctions/countersanctions. The gas crisis has been avoided and prolonged gas cutoffs are unlikely in the 2015-2016 winter period.

How do you see the crisis in Greece affecting the countries in Southeast Europe (SEE)? Which countries/ sectors do you consider to be most vulnerable, and which ones could benefit from it?

SEE is the most exposed region to Greece, through most economic channels – financial, trade, tourism, remittances and confidence. While trade exposures do not exceed 3.5% of GDP (in Bulgaria), banking sector exposures are much larger. Greece’s four largest banks hold between 14% (in Serbia) and 22-23% (Macedonia and Bulgaria) of total banking sector assets in SЕЕ, and their claims stand at 8%-19% of host countries’ GDP.

The good news, however, is that most of the Greek-owned banks in the region are subsidiaries, rather than branches, and their reliance on parent-bank funding has declined significantly since the outbreak of Greece’s sovereign debt crisis.

What other key factors do you think will impact the economic outlook of the countries in the region?

The region continues to be challenged from a mutually reinforcing process of deleveraging and weak domestic demand. Banks’ ability to make new loans will remain hampered by the need to allow for possible losses on loans made prior to the Eurozone crisis.

The region is also still heavily exposed to Russian gas transiting through Ukraine, while the gas dispute between the two countries continues. The process of building infrastructure in CEE/SEE that would allow greater interconnectedness and reverse flows is ongoing, but will take several years to complete.

The flow of migrants and refugees from crisis hit countries in the Middle East (Syria, Libya, Yemen) also poses significant challenges to countries in the region, where Serbia receives by far the largest percentage of refugees.

Which economies in SEE do you think will pace GDP growth in 2015 and which would be the main growth drivers?

Macedonia and Romania will be the fastest growing economies in the region in 2015, expanding by 3.5% and 3.2% y/y respectively, driven by recovering demand in the Eurozone, feeding into domestic consumption, and the ending deleveraging process. Most of the other countries in the region, in the meantime, either suffer from sluggish domestic demand (Serbia, Croatia, Bulgaria) or face pressures from geopolitical tensions in their major trading partners (Moldova, in the case of the Russia-Ukraine crisis, and Turkey, suffering from both Ukrainian and Middle Eastern crises).

Which countries in the SEE region do you expect will be the top performers in terms of attracted FDI in 2015, and why? Which are the most attractive sectors to foreign investors in the region?

If the latest trends persist, Macedonia should continue to receive rising volumes of FDI, having seen a 35% increase in project numbers and a 74% increase in foreign capital investment in 2014. This has been driven by its extensive business environment reforms and the country’s recently acquired EU membership candidate status. In 2014 Macedonia outperformed in FDI job creation, up of 223% compared to the previous year according to the EY European Attractiveness survey 2015. Both Serbia and Bulgaria appear in the ranking at the 12th and 13th position respectively. In terms of volume, Romania ranked among the top 15 FDI destination in Europe in 2014 and is likely to remain one of the largest destinations for inward FDI in Southeastern Europe in the coming years. After lagging behind for many years, Romania’s aggressive anti-corruption reforms since 2013 improved the country’s investment climate, attracting both market- and export-oriented FDI.

Manufacturing and ICT will remain the most attractive sectors.

What is your outlook the level of NPLs in SEE countries this year? Which of them according to your view will manage to keep bad loans under control and reduce their NPLs to sustainable levels in mid-term and why?

According to the 2015 IMF Global Financial Stability Report, Serbia, Albania (both at 23%), Montenegro and Bulgaria (17%), as well as Romania (15.3%) suffer from the highest levels of NPLs as a share of total assets. According to the IMF NPLs in Serbia and Romania, however, are by now better provisioned for, leaving NPLs-net-of-provisions at a negative -3% in Serbia and a manageable 5% in Romania. On the whole, NPLs-net-of-provisions are lowest in Serbia (-3%), Turkey (0.8%) and Macedonia (2%), and highest in Montenegro (9.3%), Bulgaria (8.5%), and Albania (7.5%).

* EY is the global brand name of Ernst & Young Global Limited.