Explainer video: Scope Ratings introduces its 2022 Global Sovereign Outlook
We expect broad-based, if uneven, economic expansion in the 11 EU member countries of the region (CEE-11) to continue, marking aggregate calendar-year growth of 4.6% in 2022 – albeit somewhat slower than a 5.6% expansion this year. This includes: 4.1% in Poland next year (after 5.5% in 2021), 5.4% in Hungary (after 7.5%), 5% in Romania (after 7.2%), 4.8% in Croatia (after 8.8%). Slovakia (5.3% in 2022, after 3.7% in 2021), Bulgaria (4.8% in 2022, after 3% this year) and the Czech Republic (4.7% next year, after 3% in 2021) are seen bucking normalisation trends, with growth accelerating in 2022.
Outside the EU, Russia similarly grows a more moderate but nevertheless above-potential 2.7% next year, after 4.5% this year. However, Turkey is seen slowing sharply to 2.3% in 2022, after 10.8% in 2021, while Georgia normalises to 5.5% economic growth next year, after 9.8% this year.
A constraint remains elevated budget deficits of the region
One constraint remains still-elevated budget deficits preventing any meaningful reduction of government debt and exposing economies to further tightening in global financial conditions.
Budget deficits will have remained elevated around 5.5% of GDP on aggregate in the CEE-11 in 2021, after 7.1% of GDP in 2020, as governments have prolonged discretionary spending in support of households and business. As a result, public debt ratios peak in 2021 – around levels not seen since peaks of the global financial crisis – before stabilising and gradually declining from 2022. Altogether, an aggregate budget deficit of the CEE-11 shrinks to 3.8% of GDP in 2022.
Russia ought to get near a balanced budget over 2022-23. In Turkey, increasingly frequent economic crises have brought repeated requirement for the counter-cyclical use of budgetary resources. Scope sees Turkish general government deficits of 5.4% of GDP in 2022, further increasing to 6.4% in a 2023 election year, after a more-modest-than-anticipated 3.2% this year.
Quality of economic policies increasingly important given changing political landscape
Inflation is running above target across CEE markets, limiting the room central banks have to aid recovery through continued accommodation in monetary policies.
Under this context, the quality of economic policies is increasingly important for growth and sovereign credit quality in the region given a changing political landscape, prolonged fiscal adjustments, rising labour shortages, and evolving environmental and technological challenges.
Access of the CEE-11 to substantive EU investment funding provides an historic opportunity to raise longer-run potential rates of economic growth via expenditure on digitisation, infrastructure and climate change. Improved economic resilience and curtailed external-sector risk contribute to improving outlooks as concerns the Baltic states, Bulgaria and Croatia, the latter two benefitting from accession to the Exchange Rate Mechanism II and Banking Union of the European Union.
Even so, higher-than-usual policy uncertainty persists across some CEE-11 economies, notably in Poland and Hungary, where added tensions with the EU over the rule of law could result in further delay of EU financing and adversely impact growth and public finance outlooks. The CEE economies most integrated into global supply chains, such as Slovakia and the Czech Republic, whose economies are reliant on the shortage-hit automotive sector, face nearer-run slowdown in growth momentum.
Geopolitical tensions and sanctions risk impact outlook for Russia, while Turkey goes from crisis to crisis
Russia is benefitting from an improved outlook concerning commodity prices. Effective fiscal and monetary management has abetted stabilisation of its economy, while lowering exchange-rate volatility. These developments supported Scope’s earlier upgrade of Russia’s credit ratings to BBB+/Stable.
However, geopolitical tensions are running high. Latest US efforts to defuse crisis in Ukraine might prove crucial, but Russia faces risk that further international sanctions are adopted, weighing on investment and growth outlooks. The significance for the credit ratings of Russia from sanctions risk hinges at this stage upon whether Russia’s approach on Ukraine favours maintaining a status quo, attenuating outstanding conflicts, or, instead, favours escalating a geopolitical crisis with risk of more punitive sanction repercussions from western counterparties.
In Turkey, looser financial conditions have anchored very high growth of 2021 at expense of the intensification of macroeconomic imbalances, manifested in the depreciating lira and inflation of above 20%. Turkey’s policy framework, as President Recep Tayyip Erdoğan has consolidated personal control over government and the central bank, is inconsistent with the economy’s long-run sustainability.
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