A full recovery in most central and eastern Europe (CEE) countries to 2019 pre-crisis output levels is unlikely until after 2021. Under Scope’s baseline scenario, the expected significant GDP contractions in Q2 2020 in all CEE economies will be followed by recovery from Q3 2020. “We expect average capacity utilisation in CEE to return to around 90% of pre-crisis levels from Q3 under the assumption of a continued global recovery,” said Levon Kameryan, analyst in sovereign ratings at Scope.
“The speed and resilience of the regional recovery, however, will depend on several factors, including the impact of Covid-19 on regional economies in the second half, underlying structures of economies, the size and effectiveness of domestic as well as EU stimulus programmes – the latter representing a major opportunity for the EU CEE member states, the recovery in neighbouring Western Europe, and developments in global energy markets and investor sentiment, especially key for Russia and Turkey, but also for other CEE countries,” said Kameryan.
Accommodative monetary policies expected to be maintained, but also hold risks
Scope expects highly accommodative monetary policies to be maintained throughout the region over 2020, with only a few central banks likely to deliver more cuts, however, as inflation falls to or below targeted levels due to the pandemic’s severe adverse impact on domestic demand. As uncertainties regarding the duration of the Covid-19 crisis and associated risks to growth linger, we expect regional currencies to remain volatile, although they may strengthen further on the back of improving global sentiment.
“The quantitative easing kickstarted by several central banks in the region to back large fiscal stimulus packages and stabilise domestic capital markets is likely to play a bigger role in regional monetary policy toolkits going forward,” said Kameryan. “But we caution that such tools should continue to be used prudently to avoid capital outflow and elevated currency pressures, especially in emerging countries with higher reliance on external financing and weaker public finances.”
The CEE central banks, alongside the forceful actions of the G4 central banks, in most cases have helped contain debt-financing costs in the region. This has resulted in improved investor assessment of sovereign risk, as reflected in a decline in regional one-year euro and dollar sovereign CDS spreads after the sharp increases in March and April, although the magnitude of recent declines has varied by country and spreads remain elevated in the case of Turkey.
Major 2020 output declines across the region
Among EU CEE economies, the most moderate output drop is projected in Poland (4.2%) in 2020, thanks to the economy’s high diversification, and resulting lower exposure to international value chains and tourism. Hungary (2020 growth forecast: -6%), Czech Republic (-7.5%) and Slovakia (-8.1%) are the most exposed to global value chains in CEE, reflecting higher dependencies on respective automotive industries, which had to temporarily halt production. The ability of economies to adapt to structural changes in the automotive sector will be important for maintaining comparative advantages in the post-Covid-19 period, given as well the EU’s increasing budgetary focus on the low-carbon society.
Scope is now projecting a 2020 output drop in Romania of 6.3%, with less room for fiscal stimulus given already elevated budget deficits entering 2020. The Croatian economy is seen contracting around 9% this year, Slovenia’s by 7.6% and Bulgaria’s by 7%. On 10 July, Bulgaria and Croatia’s admissions to the Exchange Rate Mechanism II and Banking Union were announced formally by the European Commission. Lastly, the small, open Baltic economies are foreseen contracting by 7.5-8% in 2020.
Russia’s recovery will be challenged by OPEC+ arranged cuts in oil production, lower-for-longer oil prices, and weak household consumption due to the crisis. The rating agency has revised its 2020 growth forecast for Russia down to -6.8%, from -4.9%. Scope expects continuity with regards to prudent fiscal and monetary policies following the constitutional changes in Russia, though more profound structural reforms on the domestic side to raise the economy’s weak growth potential are unlikely any time soon.
Turkey’s economy is forecasted to contract by 4.2% in 2020. In addition to the severe adverse economic impact of the public health crisis, Turkey’s macroeconomic stability remains exposed to increasing external sector risks, including declines in reserve adequacy and significant exposure to lira depreciation and periods of capital outflow. On 10 July, Scope revised the long-term ratings of Turkey to B+, from BB-.
Finally, Scope forecasts Georgia’s real GDP to contract 5% in 2020, due to the economy’s dependence on tourism and travel services, which account for around 30% of Georgia’s GDP, including indirect impacts.
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Levon Kameryan is Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH.