IMF says emerging Europe to enjoy solid growth through 2007

The 13-emerging market countries in Europe can look ahead to sound economic growth this year and next, powered by strong domestic demand, but their reliance on volatile short-term foreign investment poses a risk, the IMF said.
The International Monetary Fund in its twice-yearly World Economic Outlook found momentum to be especially vibrant in the Baltic states - Estonia, Latvia and Lithuania - and in Turkey.
The outlook overall, it said, "is for continued solid regional growth ... as robust domestic demand growth is expected to continue."
The regional forecast is for output to expand 5.4 pct this year, after 5.5 pct in 2005, slipping to 5.0 pct in 2007.
The study focused on Turkey, Estonia, Latvia, Lithuania, the Czech Republic, Hungary, Poland, Slovakia, Slovenia, Bulgaria, Croatia, Malta and Romania.
The principal risk to emerging markets in Europe, according to the Fund, stems from the region's "heavy reliance on foreign savings" which represents "a particular vulnerability if international financial market conditions become even more testing."
The region is heavily dependent on volatile and short-term capital inflows rather than foreign direct investment, which is geared to longer-term projects that can boost growth and employment.
"Policymakers must carefully balance the growth opportunties provided by foreign savings against the risks," the IMF argued.
At the same time, authorities need to take steps to reduce public debt in order to retain investor confidence - most notably in Hungary, where the public deficit is likely to hit 10 pct of GDP this year.
Policymakers in Turkey, the Czech Republic, Hungary and Slovakia will need to be prepared to raise interest rates "if continued rapid growth, depreciating exchange rates or rising global inflationary pressures add to current pressures on prices," the IMF said.
In addition, the region must try to overcome low employment rates that reflect a reaction by companies to "cumbersome restrictions" on worker dismissals and temporary employment as well as measures that disourage people from applying for jobs.