By Carolyn Cohn
LONDON, Nov 8 (Reuters) - The global credit crunch could hit longer term growth in eastern Europe and the former Soviet Union and more structural reforms are needed, the European Bank for Reconstruction and Development said on Thursday.
Growth in the 29 transition countries tracked by the EBRD -- the development bank for the region -- may reach a record high of 7.0 percent in 2007, up slightly from 6.9 per cent in 2006, the EBRD said in its annual transition report.
But the EBRD forecast growth falling to 6.1 per cent in 2008, as woes in the U.S. subprime mortgage sector drive up borrowing costs around the world.
"Perhaps the most surprising observation is how well the region has coped so far with (global) pressures ... but there will be an impact on growth. There are vulnerabilities," Erik Berglof, chief economist at the EBRD, told reporters ahead of publication of the report.
Contagion was hitting the region, as financial openness had increased rapidly in recent years, the report said.
This was particularly likely to affect financial sectors and economic growth in countries with large financing needs in corporate or financial sectors. Kazakhstan and the Baltic states are seen by analysts as particularly vulnerable.
Capital flows to the region were likely to fall slightly from the record levels of previous years, as the Eurobond market largely dried up in August and September.
REFORM SLOWING
The pace of reforms as measured by EBRD transition indicators has slowed, the report said.
Countries in south-eastern Europe continue to play catch up, but other reform progress has been more uneven, and more needs to be done to strengthen the financial sector and stimulate entrepreneurial activity.
The EBRD said reforms in price and trade liberalisation and small-scale privatisation had largely been done.
Large-scale privatisation and financial sector reform had progressed in new EU member countries but was less advanced elsewhere.
Reforms in corporate governance, competition policy and infrastructure had further to go in the most advanced countries in central eastern Europe and the Baltic states and were only at an early stage elsewhere in the region, the report said.
The private sector should also play a greater role in helping transition countries provide the level of public services that responded to people's needs, the EBRD said.
Satisfaction with the level of public services remains low, despite relatively high levels of public spending.
Total trade between China and the transition countries rose almost five-fold to $74 billion between 2000 and 2006.
The report said the region had so far been able to withstand the competition from Chinese exports in most sectors.
But "as labour costs are increasing ... investments to upgrade technology and enhance productivity and quality are key in the face of growing competition from China."
Unemployment also remains a problem in many EBRD countries, despite recent signs of improvement. Low employment rates have become a major feature of the region, as people have dropped out of the labour market, the report said.
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((Reporting by Carolyn Cohn; editing by Ruth Pitchford; Reuters Messaging carolyn.cohn.reuters.com@reuters.net; +44 207 542 6320))
Keywords: EBRD REPORT/
