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LONDON (Reuters) - The European Bank for Reconstruction and Development (EBRD) predicted on Wednesday that its region's growth would pick up moderately as stable commodity prices supporting Russia and surrounding countries offset headwinds in Turkey.
The EBRD - which operates in 36 countries from eastern Europe to Morocco and Mongolia - trimmed the projections from its last round of forecasts in November, striking a cautiously positive tone though warning of increasing economic and political uncertainties ahead.
"As oil prices have stabilized at levels well above those seen in the first half of 2016 and the Russian economy has emerged from a two-year recession, growth in the east of the region is projected to pick up gradually," the EBRD said in its biannual economic report.
"The outlook for Turkey and Southern and Eastern Mediterranean has weakened somewhat reflecting, in part, security and geopolitical risks and a resulting drop in tourism receipts and investment."
The EBRD predicted growth across its region would rise from 1.8 percent in 2016 to average 2.4 percent in 2017 and 2.8 percent next year. In November, the bank had forecast 2017 growth at 2.5 percent.
While the acceleration was broad based, it fell short of both the world average growth as projected by the International Monetary Fund and the EBRD's own region long-term average growth, it added.
The EBRD slashed Turkey's growth outlook by 0.4 percentage points to 2.6 percent this year after slow growth in 2016 due to factors including a credit rating downgrade to 'junk', the state of emergency since the failed coup and the lira TRY= weakening by 17 percent against the dollar in 2016 which pushed inflation to double digits for the first time in five years in February.
"Turkey's external situation remains a challenge," it said. "Gross external financing needs are almost 25 percent of GDP, leaving the country exposed to global liquidity conditions."
For Russia, the EBRD confirmed its previous 2017 growth forecast of 1.2 percent and predicted 1.4 percent in 2018.
"Growth is also expected to pick up slightly in Central Asia and Eastern Europe and the Caucasus, reflecting a stabilization of commodity prices and resumed growth in Russia," it said.
Central Asia and the Southern and Eastern Mediterranean retained their places as the bank's two fastest growing regions, but both saw their forecasts trimmed back from November.
Central Asia was expected to grow 3.8 percent this year with foreign direct investment from China as part of its One Belt One Road initiative lifting most of the region's economies.
Southern and Eastern Mediterranean countries followed on the heels at 3.7 percent. However, all countries in this category - Egypt, Jordan, Morocco and Tunisia - saw growth forecasts trimmed due to factors such as rising inflation hampering consumption and regional turmoil weighing on tourism.
Overall, the report pointed out that forecasts were subject to major geopolitical tensions in and around its region as well as economic policy uncertainty in major developed economies following Donald Trump's election as president of the United States and Britain's vote to leave the European Union.
"In addition, the global environment is characterized by increased political uncertainty and a number of conundrums, notably the substantial improvement in economic confidence indicators that have not been reflected in hard economic data."
Capital flows to emerging markets and also the EBRD region, including bond and equity flows, strengthened in the first months of 2017, the bank noted. Russia had been one of the main beneficiaries of that trend, the EBRD added.
Reporting by Karin Strohecker; Editing by Janet Lawrence