Regional Economic Prospects May 2016 Modest pick-up amid continued uncertainty European Bank for Reconstruction and Development May 2016

Key developments, outlook and risks 2

3 Average growth in the region to pick up modestly from 0.5% in 2015 to 1.4% in 2016; 2.5% in 2017 Source: IMF WEO; EBRD forecasts At the same time, outlook for 2016 has weakened slightly since November 2015

Divergent trends driven partly by external factors 4  Modest global growth and weak Eurozone growth constrain external demand  Low commodity prices and continued recession in Russia are weighing on the outlook for Central Asia, Eastern Europe and the Caucasus (EEC)  US monetary tightening led to lower capital inflows to the region, while ECB QE program supports growth in CEB, SEE Source: IMF WEO; EBRD forecasts

5 Oil prices have recovered somewhat from January lows Source: Bloomberg But are lower than at the time of the previous REP forecasts

6 Currencies of major oil exporters adjusted, broadly preserving local currency price of oil Source: Bloomberg

7 Russia remains a leading economic partner for many economies in EEC and Central Asia Source: UN Comtrade; IMF; CBR; national authorities; EBRD calculations Even as the weight of China as an economic partner has been rising

8 Capital flows to the region declined as the US Fed started tightening monetary policy Source: IIF; EBRD calculations Mirrored by lower inflows in emerging markets in general

9 Accommodative ECB policies benefit CEB and SEE in particular Source: European Central Bank; Bloomberg ECB expanded QE, announced TLTRO II in March 2016

10 Credit growth has slowed down markedly in EEC and Central Asia, as well as Turkey Source: National authorities via CEIC; EBRD calculations

Risks and vulnerabilities 11  Geopolitical tensions in and around the region  A sharp deceleration in China’s growth  A prolonged weakness in commodity prices − exacerbating pressures on Russia, as well as countries in Central Asia and Eastern Europe and the Caucasus  Brexit vote sparking higher volatility in financial markets – with implications for Central and south-eastern Europe in particular

Key country developments 12

13 Consumption supports growth in CEB and SEE, owing in part to terms-of-trade gains Source: EUROSTAT; EBRD calculations. Includes CEB, Romania and Bulgaria.

14 Following strong 2015 outcome due to one-off factors, Turkey’s growth is projected to moderate to 3.2% Source: National authorities via CEIC Current account deficit decreased on the back of lower energy import bill partly offsetting lower non-FDI capital inflows

15 In Russia, a drop in private consumption is partly offset by import contraction Source: National authorities via CEIC

16 Azerbaijan hit by oil price shock, but substantial liquidity buffers cover 25 months of imports Source: National authorities; IMF; EBRD estimates

17 Remittances to CA & EEC declined by 40% in US$ terms – mostly due to exchange rates Source: CBR; CEIC; Bloomberg and EBRD calculations  Near constant in roubles; down 20% in local currencies of recipient countries  Downward trend continued in Q1 2016

18 In Ukraine, marked improvement in twin deficits Source: National authorities; IMF  Combined government and Naftogaz deficit decreased to 3% of GDP  Current account deficit of 9% of GDP in 2013 almost eliminated

19 Blows to tourism and poor export performance weigh on growth in Egypt and Tunisia Source: National authorities via CEIC and Haver, seasonally adjusted data for tourism.

20 Overall, growth is expected to pick up in 2016 but slightly less than projected in November Source: EBRD forecasts  Upward revisions mainly in SEE, CEB and Turkey;  Downward revisions in EEC, Central Asia and SEMED