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Eastern Europe Heads for Slowdown

While eastern European economies have yet to be hit hard by the international financial crisis, the happenings in the West are causing a slowdown in many of the former Soviet Bloc nations.

Women shop in a Market hall in Riga, the capital of Latvia

So far eastern European economies haven't been directly affected by the financial crisis

Eastern Europe's slowing economies face growing risks from the global credit crunch, but most of the ex-communist regions will post faster growth than western Europe in 2009, the International Monetary Fund (IMF) said Wednesday.

Slovakia, which is slated to switch to the euro on Jan. 1, was tipped to lead growth next year -- 5.6 percent -- followed by European Union newcomers Romania, 4.8 percent, and Bulgaria, 4.2 percent.

With part of the Baltics already believed to be in recession, the IMF noted that southern Europe's continuing boom is based on much the same mix of consumer spending, loans and capital investment driven by western banks and companies. Inflation, while likely to ease in 2009, is eating into people's spending power.

Overall, the region from the Baltics to Bulgaria is headed for a third year of slowing growth, down to 3.5 percent in 2009 from a predicted 5.0 percent in 2008, the IMF said in a report released in Washington. And the risk that the region's financial imbalances will spook investors is rising at a time of tighter credit, the semi-annual World Economic Outlook said.

"Growth is expected to continue to decelerate markedly, including on account of diminishing capital inflows and tighter financial constraints," the survey said.

Indirect effect

Soaring food and energy prices are slowing consumer spending, while the global credit crunch and sickly growth in western Europe -- eastern Europe's main market -- is weighing on investment and exports, the IMF said. It added that while banks operating in emerging Europe have little direct exposure to the US subprime mortgage market, they and their foreign parents are affected by the widening turmoil in western Europe.

"The policy challenge is how to engineer a soft landing" while keeping the region on track toward western European living standards, IMF analysts said.

They foresee a clear three-way split for the European Union's emerging economies in 2009: the three Baltic nations ailing after a long spending and investment boom, with Latvia's economy shrinking by 2.2 percent; central Europe growing an average 3.6 percent; and Romania and Bulgaria still going strong.

"Like the Baltics several years ago, these countries are still enjoying 'good times,'" the IMF said of the two south-eastern EU members.

But Romania, expected to lead the region this year with 8.6-percent growth, and Bulgaria need to recognize the "more volatile external financing conditions" and rein in public spending, the report said.

Underscoring the jitters, plunging share prices forced Romania's stock exchange in Bucharest to halt trading for the day shortly after opening Wednesday. In the Baltics, recovery is expected to begin during the second half of 2009, but authorities should "resist the temptation to significantly ease fiscal policy in the downturn" and work toward balanced budgets, the IMF added.

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