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Central & Eastern Europe braces for slow, uneven economic recovery from Covid-19 pandemic

Central and Eastern Europe’s economies, Poland among them, will contract slightly less severely than previously expected this year after a strong third-quarter recovery from the previous quarter’s slump. But output will return to pre-pandemic levels in most cases only after 2021 as the Covid-19 health crisis weighs on economic activity. A critical factor is how strong the recovery is in the rest of Europe and how much governments can support labour markets.

Lingering uncertainties over the duration of the Covid-19 pandemic are the main downside risks facing the economies in Central and Eastern Europe in the fourth quarter and next year.

Another determining factor is how robust the economic rebound proves in western Europe, assuming that governments impose restrictions to contain the renewed wave of Covid-19 infections that are less economically damaging than restrictions of the spring. Even so, daily coronavirus cases and fatalities have reached record levels in many CEE countries, which will inevitably have an adverse impact on economic .

We therefore caution against expectations of a rapid and uniform economic recovery. The regional recovery, after significant interruptions in the current quarter and entering 2021, will remain subject to setbacks over 2021 though we expect a resumption of momentum in economic recovery starting by next spring.

The less gloomy news is that this year’s slump in the CEE countries’ gross domestic product may not be as bad as it looked several months ago

The less gloomy news is that this year’s slump in the CEE countries’ gross domestic product may not be as bad as it looked several months ago due to less severe declines in second-quarter output and a stronger third-quarter rebound than we expected at the time of our previous forecasts in July. Decisive monetary-policy action by the region’s central banks and fiscal stimulus from governments have possibly spared the region from  much deeper economic contractions.


Milder-than-expected recessions in Poland, Czech Republic, Baltic states

We have marginally improved our growth forecast for Poland (rated by Scope at A+ with Stable Outlook) to a 3.9% decline in output this year from a 4.2% forecast three months ago. The change reflects the economy’s relatively modest exposure to international tourism and global supply chains, both badly disrupted by the pandemic.

Recessions this year could also be milder than previously expected in the Czech Republic (AA/Stable) at -7% compared with -7.5%, Romania (BBB-/Negative) -5.5% vs -6.3%, Slovenia (A/Stable) -7% vs -7.6% and Bulgaria (BBB+/Stable) -5% vs -7%. Scope’s forecasts for a deep contraction in GDP are unchanged in Hungary (BBB+/Stable) at -6%, Slovakia (A+/Negative) at -8.1%, and Croatia (BBB-/Stable) at -8.9%.

The economic outlook is less gloomy in the Baltics this year. Scope forecasts a fall in GDP in Lithuania (A-/Positive) of -1.5%, revised from a previous forecast of -7.6%, after surprisingly resilient economic activity in the second quarter;  Estonia (AA-/Stable) revised to -5.5% from -7.7%; Latvia (A-/Stable) to -5.5% from -8%.

For CEE euro area member states, the ECB’s asset purchase programmes have played a crucial role in cushioning the economy from the worst of the Covid-19 shock by underpinning low borrowing rates, with the area’s fortunes helped by the euro’s reserve-currency status. Government borrowing costs remain low, as reflected in 10-year euro-denominated yields of Slovakia, Slovenia, Lithuania and Latvia, each at close to 0%.


Rising fiscal risks in non-euro-area countries

Compared with euro area CEE countries, fiscal risks have materially increased for non-euro-area CEE governments. They benefit from less significant monetary policy support for national governments’ borrowing, and face higher risks linked to foreign-currency denominated public debt issuance given local-currency debt markets are less developed.

Croatia, Hungary and Romania each face material increases in public debt levels by around 10% of GDP in 2020. However, we expect a stabilisation and gradual decline in debt ratios in most CEE countries as recoveries progress. At the same time, further development of local capital markets, especially in Hungary and Croatia, is important for these governments to assure the successful rollover of higher outstanding amounts of public debt.


Interested in this article?

The full text is available in the November ’20 issue of Credit Manager Magazine.


Authors of the article:

Levon Kameryan

Analyst for sovereign and public sector ratings at Scope Ratings, specialising in Central and Eastern Europe. Levon graduated with a M.Sc. in International Economics and Public Policy from the University of Mainz in 2016. Levon worked previously as an economist at the Central Bank of Armenia and Deutsche Bank.

Dennis Shen

Macroeconomist and a Director in sovereign ratings with Scope Ratings in Berlin, Germany. Before he joined Scope in 2017, Dennis was a European Economist with Alliance Bernstein in London. Dennis graduated from the MPA in International Development from the London School of Economics in 2013 and completed undergraduate studies at Cornell University.


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