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By Adam Jasser
WARSAW, April 23 (Reuters) - The Baltic states should see a
soft landing from the global economic slowdown but there is
still some risk of a harsher outcome there and in Romania and
Bulgaria, the International Monetary Fund said on Wednesday.
Central and eastern Europe's developing economies, which are
growing at a much faster rate than the rest of the continent,
should continue catching up their richer western counterparts,
but at a slower pace, the Fund said in a report.
Ajai Chopra, deputy head of the IMF's European Department,
said the risks faced by the region were external, and
particularly acute for countries with wide external imbalances.
"Our basic scenario for the Baltics is a soft landing,"
Chopra said at a conference in Warsaw. But he added: "The risk
of a hard landing cannot be excluded, not just in the Baltics
but in Romania and Bulgaria too."
Chopra also said euro zone aspirant Slovakia had made good
progress on inflation -- its toughest challenge for adopting the
currency -- but would need tight fiscal and wage moderation to
keep it on track.
Slovakia has cut inflation below the nominal criteria for
euro entry but European officials have said they are focusing on
its ability to keep price growth at sustainably low levels.
Slovakia aims to adopt the euro next year. The European
Commission is due to rule on its readiness on May 7.
"FLASHING RED"
In a report outlining its European economic outlook, the
Fund said it expected spillovers from the weaker global
expansion to cause a decline in European growth of 1.25
percentage points in 2008.
But unlike in western Europe, where the Fund advocated
policymakers eventually ease rates to shore up growth, Chopra
advocated tighter policy in emerging Europe to staunch the
domestic demand that could put those economies at risk.
"Widening current account deficits are part of convergence
... But some current account gaps should be flashing red for
policymakers," he said.
"Fiscal policy should be used more to tackle demand."
Romania, Bulgaria, Estonia, Latvia and Lithuania have seen
their current account deficits balloon over the last decade as
their consumers use higher wages to buy foreign-made goods and
firms import equipment to produce goods.
The Baltic countries have a relatively low level of
investment going into tradeable goods production compared to the
leading economies in the region, such as Poland and Slovakia.
The gaps make them vulnerable in swift slowdowns, especially
if foreign direct investment, which offsets the deficits more
than exports, slows due to tighter global liquidity.
Christoph Rosenberg, the IMF's regional senior
representative, said those countries were witnessing a "halo
effect" linked to their joining the European Union since 2004
that may help them avoid pain in serious market turbulence.
"Countries in the region can get away with high imbalances
thanks to EU membership," he said, adding that bond spreads of
the EU newcomers were 100-200 basis points lower than those of
comparable emerging markets.
The Fund also urged countries with wide external gaps and
high levels of external debt to strengthen their financial
sectors with lending limits and supervision, among other
measures, to better ward off shocks.
(Reporting by Adam Jasser; Writing by Michael Winfrey; Editing
by Stephen Nisbet)
