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

Top 100 See - - See Top Industries - By Djordje Daskalovich

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 cri­sishit 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.

SEE con­tin­ues to be chal­lenged by a mu­tu­ally re­in­forc­ing process of delever­ag­ing and weak do­mes­tic de­mand The flow of mi­grants and refugees from cri­sis-hit coun­tries in the Mid­dle East poses sig­nif­i­cant chal­lenges to coun­tries in SEE Man­u­fac­tur­ing and

ICT will re­main the most at­trac­tive sec­tors for for­eign in­vestors. Ro­ma­nia is likely to re­main one of the largest des­ti­na­tions for in­ward FDI in SEE thanks to its ag­gres­sive anti-cor­rup­tion re­forms

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.

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