(Updates with more details, background)
* EBRD ups 2010 forecasts for emerging Europe on Germany
* Hot money flows could destabilise, Turkey at risk
* Southeast Europe growth still weak, Greece still a threat
By Sebastian Tong
LONDON, Oct 28 (Reuters) - The European Bank for
Reconstruction and Development raised its growth forecasts for
emerging Europe for this year and next on Thursday, but warned
that hot money inflows left economies such as Turkey vulnerable
to a sudden shift in investor sentiment.
The EBRD said emerging Europe was benefiting from Germany's
robust recovery, which had prompted it to raise its 2010 growth
forecast for the region to 4.2 percent from 3.5 percent
previously.
However, it said economies in southeast Europe would remain
weak and still at risk from the Greek debt crisis.
"The reason why we upgraded our growth forecasts is ...
Germany. The region was saved to some extent by the resilience
of the German economy," EBRD Chief Economist Erik Berglof told a
media briefing.
Central and eastern Europe is emerging from its steepest
recession since the collapse of communism in the region two
decades ago when the development bank was set up to help former
communist economies adjust to free markets. The region is riding
on Germany's surprisingly strong economic recovery as countries
like Slovakia make key components and goods for German
manufacturers.
The EBRD said economic recovery was broadening out but the
region remained sharply split between countries supported by
rising commodity prices and capital inflows and those mired in
recession or feeble growth.
In 2011, the London-based lender expects gross domestic
product across the 29 economies in which it operates to grow 4.1
percent, up from 3.9 percent forecast in July.
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For the EBRD's GDP forecasts for its 29 countries of
operation, please click on:
http://r.reuters.com/pav62q
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The EBRD expects southeastern Europe to suffer an economic
contraction of 0.6 percent this year before seeing growth of 1.6
percent in 2011.
While exports in this part of the continent are growing
rapidly, domestic demand in most countries remains sluggish and
many are struggling on the fiscal front.
The bank said that spillover risks from Greece's sovereign
debt crisis had been contained thus far but warned that it still
had the potential to disrupt economic activity in the region if
the situation deteriorated.
POLICY CHALLENGES
Berglof said eastern and central European economies needed
to accelerate structural reforms to emerge stronger from the
downturn.
"There is a real need not to be complacent by riding the
waves of capital inflows or by taking the temporary improvement
in exchange rates for granted," he added.
Low interest rates in major developed economies such as the
United States and Japan have prompted investors to plough record
amounts into emerging markets, including eastern and central
Europe.
The EBRD said hot money flows flooding some economies in the
region could pose "policy challenges" in the medium term but
said countries could use these to build up foreign exchange
reserves to cushion against future external shocks.
It noted particular risks in Turkey where strong capital
inflows had combined with rising credit growth and modest fiscal
stimulus to boost domestic demand.
This had led to a rise in imports that had widened the
current account deficit to nearly 6 percent of GDP on an
annualised basis, increasing the economy's vulnerability to a
reversal in capital inflows.
Berglof also identified Russia and Poland as vulnerable to a
sudden falloff of capital flows, which remain overwhelmingly
portfolio-driven rather than for longer-term foreign direct
investment.
"The concern in Poland is that (the capital flows) could
feed the boom in the real estate market ... The main concern is
that there is overheating in parts of the economy," he said.
The forecasts do not include the Czech Republic which has
graduated from the EBRD's lending programmes.
(Reporting by Sebastian Tong; editing by Susan Fenton)
