The European Bank for Reconstruction and Development has decreased its October forecast for Bulgaria's economic growth in 2012 by 1.1% to reach 1.2%.

The only Southeast European country that has seen a larger decrease in the Bank's latest Regional Economic Prospects report is Bosnia, whose forecast has been dropped by 1.8%.

The expected decrease in Bulgaria's exports, as well as the ongoing debt crisis in neighboring Greece are expected to be the key factors to have a negative impact on the Balkan country's economic growth throughout the year.

Measures to reduce the fiscal deficit will continue to be implemented and the government is committed to the currency board and entry in due course into the ERM-II mechanism, the report reckons.

The main risk the country faces is that its close links to Greece could lead to negative spill-over effects in terms of trade, investment and the financial sector.

It has been pointed out in the report that Bulgaria was the only country in the CEB and SEE regions positive bankrelated cross-border capital inflows in the fall, even though they followed earlier outflows.

The EBRD has reduced its economic growth forecasts for 2012 for central and south eastern Europe, as well as eastern Europe and the Caucasus, and warned that a further deterioration of conditions in the eurozone could have a substantial further impact on the whole of the EBRD region.

The Bank's latest Regional Economic Prospects report also calls for a coordinated response from all parties to limit the impact of the eurozone crisis on eastern Europe.

The report sees a significant overall slowdown in growth across the EBRD's 29 countries of operations from central and south Europe to central Asia – to an average 3.1 per cent in 2012 from 4.8 per cent in 2011.

Although this outlook is based on no further deterioration in the eurozone crisis, the report refers to "substantial risks" to the baseline scenario.

It says a worsening of the eurozone turmoil would pose a systemic challenge to emerging Europe because of the deep integration of its banking sector with eurozone-based banks, particularly if compounded by the re-emergence of uncoordinated national policies, with negative cross-border spillovers. The EBRD region would also be negatively affected by a resulting slowdown in the U.S. and elsewhere and from linked declines in commodity prices.

The forecast for 3.1 per cent growth across the whole EBRD region is roughly in line with predictions made last October, but the new report underscores a growing divide among the 29 countries surveyed.