The FINANCIAL — The economies of central and eastern Europe (CEE) have continued to rebound from last year’s pandemic-related recession, ensuring mostly improved sovereign credit outlooks for 2022, says Scope Ratings.
Scope expects broad-based, if uneven, economic expansion in the 11 EU member countries of the region (CEE-11) to continue, marking aggregate growth of 4.6% in 2022 – albeit slower than a 5.6% expansion this year.
Outside the EU, Russia similarly grows a more moderate but nevertheless above-potential 2.7% next year, after 4.5% this year. Turkey slows 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.
One constraint to further improvement in the region’s credit outlook 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, although narrower than the 7.1% of GDP of 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 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.
“Inflation is also running above target across CEE markets, limiting the room central banks have to aid recovery through continued accommodative monetary policies,” says Giacomo Barisone, head of sovereign ratings at Scope.
“In 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,” Barisone says.
Access of the CEE-11 to substantive EU investment funding provides an historic opportunity to raise longer-run potential growth rates via expenditure on digitisation, infrastructure and climate change. Improved economic resilience and curtailed external-sector risk are factors in improving outlooks for the Baltic states, Bulgaria and Croatia, the latter two benefitting from accession to the EU’s Exchange Rate Mechanism II and Banking Union.
“Even so, higher-than-usual policy uncertainty persists across some CEE-11 countries, 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,” says Levon Kameryan, senior analyst at Scope. The CEE economies most integrated in global supply chains, such as Slovakia and the Czech Republic, whose economies are reliant on the shortage-hit automotive sector, face nearer-term slowdown in growth momentum.
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 an earlier upgrade of Russia’s credit rating to BBB+/Stable.
“However, geopolitical tensions are running high,” says Kameryan. “Latest US efforts to defuse crisis in Ukraine might prove crucial, but Russia faces risk of further international sanctions, weighing on investment and growth outlooks.” The significance for the credit ratings of Russia from sanctions risk hinges 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 driven 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.