Reuters
By Anna Willard

The International Monetary Fund said on Tuesday the risks to emerging market economies in Europe are tilted to the downside, even though there is reason to believe regional growth will remain resilient.

The IMF warned that high current account deficits make some countries, like Hungary and Poland, particularly vulnerable.

``Risks for the region as a whole appear tilted to the downside...especially in view of the general weakening of global growth,'' the IMF said in its interim World Economic Outlook report.

The IMF said that while investor sentiment toward the countries remains strong, capital inflows could still be at risk.

``The economies of Central and Eastern Europe and the Baltics could potentially be at risk from adverse developments in global financial markets, given the rather high current account deficits in most of these countries,'' the report said.
However, the IMF said several factors contribute to a more positive outlook for the region.
On the trade side, the strong competitive position of these economies has enabled them to gain market share, and structural changes have diversified the export bases of many countries and made exports less sensitive to economic cycles. Growth in domestic demand should also help offset potential weaknesses in external trade.

``Reflecting this, growth of 3-3.5 percent is expected in 2002 in much of central Europe, and of 4-4.5 percent in southeastern Europe and the Baltics -- only marginally weaker in many countries than in 2001,'' the report said.

The report warns of limited room to ease macroeconomic policies should economic activity weaken sharply.

Inflation pressures are a concern in Hungary and Romania, while currency board arrangements in the Baltic countries and Bulgaria constrain the scope for monetary policy responses. The room for fiscal maneuver is also limited by large current account gaps.

Poland, the largest economic player in the region and which is expected to see growth climb to 2.2 percent in 2002 from an expected 1.5 percent this year, does still have room to move on interest rates.

``Monetary policy has been eased recently...and further relaxation is possible given the still high level of real interest rates,'' the IMF said.

The IMF is expecting the Czech economy to expand 3.3 percent this year, slowing slightly to 3.1 percent in 2002. The economy in Hungary will grow 3.7 percent this year and 3.5 percent in 2002, the report said.

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