“The positive impact of lower oil prices on growth will likely be offset by continuing weakness in external demand and developments in the euro-dollar exchange rate” it said.
Turkey, which last year became the largest single recipient of EBRD investment, was a specific example of a country caught in the cross currents of diverging monetary policies in the eurozone and the United States.
Turkey’s capital inflows, which largely depend on the Turkish Lira-dollar rate, may be squeezed, as the lira weakened to the dollar by 13 percent since the beginning of 2015 in expectations of U.S. monetary policy tightening, according to the EBRD.
“Nevertheless, weakening against the dollar may not translate to gains in net exports, since Turkey’s main trading partner is the eurozone, and the lira weakened to the euro by a more moderate 6 percent in the same period” it said.
Diverging monetary policy in the two currency areas will likely continue to add to currency volatility in Turkey, although perceived domestic policy volatility may also play a role, it added.
At the same time, the EBRD report predicted overall stagnation in 2015 across all 35 countries covered and meagre expansion of just 1.4 percent in 2016.
But this outlook masked stark regional differences.
“This is a very diverse picture” said acting Chief Economist Hans Peter Lankes. “There is definitely a scope for optimism especially in countries closely tied to the eurozone. But the Russian recession is cause for concern in many other economies.”
In Central Europe and the Baltics (CEB), forecasts for Poland, Slovenia, Slovakia and Hungary have been revised up, mainly reflecting the stimulus from the eurozone monetary easing that has added to the earlier positive impact of lower oil prices.
The CEB region is expected to see growth of 2.9 percent in 2015, compared with a January forecast of 2.6 percent. Expansion of 3.0 percent is seen for 2016.
Greece under the microscope
Economic convergence with more advanced countries is set to continue in earnest, said the report.
Quantitative easing (QE) by the European Central Bank (ECB), the weaker euro and lower oil costs are also benefiting economies in southeastern Europe. QE has allowed easier monetary conditions in countries with close economic ties to the eurozone.
“However, any volatility related to Greece could dampen the outlook. Countries in the southern and eastern Mediterranean have also been aided by cheaper oil and by improving confidence in the region’s largest economy, Egypt” said the EBRD.
Greece, the EBRD’s newest recipient country, has been badly hit by fears that the country may default on its external debt obligations and even exit from the eurozone.
“The EBRD’s best case scenario is that Greece will ‘muddle through,’ avoiding drastic policy moves and with just enough reforms to start growing and securing the continued support of the international community” said the EBRD.
In contrast to the recent launch of monetary easing in the eurozone, a tightening of monetary conditions in the U.S., now widely expected for early next year, will put increasing pressure on emerging markets that are dependent on capital inflows and have high dollar-denominated refinancing needs, according to the EBRD.
“At the same time, the deep recession in the Russian economy is having larger-than expected negative spillover effects on countries with which it has strong economic links. The impact of the Russian downturn has worsened the outlook for eastern Europe and the Caucasus and for Central Asia” it added.
In Ukraine, the economic disruption in the east of the country, the negative impact of the depreciation of the hryvnia, tight economic policies, energy tariff hikes and a continued contraction of credit are expected by the EBRD to maintain pressures on the economy this year.
GDP is now expected to shrink by 7.5 percent this year - a worsening of the outlook since January, when a five percent contraction was forecast, it added.