April 24, 2008	Thursday	Rabi-us-Sani 17, 1429

WARSAW, April 23: The global slowdown will put the brakes on central and eastern Europe’s rapid economic growth this year but the region will continue catching up with the richer West, the IMF said on Wednesday.

The expansion in developing Europe should decelerate to 5.5 per cent in 2008 and 5.2 per cent in 2009, from 6.9 per cent last year, with the biggest jolts coming as stars Slovakia and Latvia drop from double digit growth to single figures.

The Baltic states should see a soft landing but there is still some risk of a harsher outcome there and in Romania and Bulgaria, the Fund said.

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, he said, but 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 hurdle for adopting the single currency next year -- 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.

The European Commission will rule on its readiness on May 7.

Advanced European economies should slow to 1.5 per cent growth this year, from 2.8 per cent in 2007.

In a report outlining its European economic outlook, the Fund said spillovers from the weaker global expansion would pinch European growth by 1.25 per centage points in 2008.

In developing Europe, growth in the 10 new mostly ex-communist EU newcomers was seen slipping to 4.6 per cent this year and 4.3 per cent in 2008, versus 6.2 per cent last year.

Latvia was seen going to 3.6 per cent this year from 10.2 in 2007 and Slovakia to 6.6 from 10.4. Only laggard Hungary was seen accelerating to 1.8 per cent this year from 1.3 per cent.

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.

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.

Rosenberg also said the currencies of Poland, Hungary, Slovakia and the Czech Republic should continue to appreciate in real terms despite the global economic slowdown due to the convergence effect.—Reuters