Research Dept. News
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Monthly Report, num 351 - November 2011
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European union - Emerging Europe
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Emerging Europe: temporary weakness, underlying resistance
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The extent of the economic slowdown and financial repercussions of the debt crisis are causes for concern in emerging Europe.
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The economic situation in emerging Europe has two problematic aspects that are attracting public attention. Firstly, the loss of pace in economic activity which started in the second quarter and is showing no signs of easing. This is a process whose origin lies in the cooling off of fundamental markets for the region's economies, in particular the euro area. In this respect, the deteriorating prospects afflicting the single currency zone at present, and which may lead to the economic growth expected for 2012 being revised downwards over the coming months, adds uncertainty to this situation.
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Hungary and Romania, the most affected by financial tensions.
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A second focus of attention is related to the impact of Europe's financial crisis on the region's countries. Although it would be unwarranted to talk of widespread contagion, what is true is that, since August, country risk indicators have deteriorated in the five economies (Poland, Hungary, the Czech Republic, Slovakia and Romania) we usually look at in this report. However, the current country risk levels are only notably high in the case of Hungary and Romania. These are two markets where the increased risk is fully justified.
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Hungary is adopting an economic policy approach that is far from orthodox and not always entirely appropriate in the area of public communication. For example, the decision to allow mortgages in foreign currencies to be paid off early at a non-market exchange rate has been understood as a measure that excessively penalizes banks (according to our calculations, it could potentially involve a bank loss equivalent to 1.5% of private credit). At a time when growth is weakening, it does not seem appropriate to further affect the credit channel. This decision which, as we mentioned, is in addition to other, equally controversial decisions, is affecting the country's confidence. Romania, for its part, has significant commercial and financial links with Greece. This justifies an increase in country risk, while uncertainty regarding the Greek crisis does not disappear and the effects on Romania can be evaluated relatively accurately.
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In short, the doubts regarding the economic cycle and financial repercussions of the sovereign debt crisis have led to fears in certain circles of a hypothetical relapse in the dramatic situation that affected the region in 2008 and part of 2009. In our opinion, this assessment has little justification. First of all, the global activity figures seem to rule out the probability of the most extreme scenarios, namely those of a double dip recession, emerging in the coming quarters. By itself, this is a huge contrast with the recessive situation that assailed Europe and other advanced economies in 2008.
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Doubts increase regarding whether emerging Europe will avoid a similar slump to 2008...
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But the differences are not limited to the external environment. The region's fundamentals are clearly more solid than they were in 2008. It should be noted that the Great Recession was reached in a very mature of the cycle, with most of the economies in emerging Europe accumulating imbalances in terms of private debt, inflationary pressures and balance of payments. There has been notable adjustment on these three fronts over the last few years, particularly in countries such as Romania and Hungary which, in their day, had to resort to loans from the International Monetary Fund and other multilateral institutions to resolve their external financing problems.
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The strategy followed by the region's countries has been to provide themselves with greater independence and leeway in the area of economic policy to be able to handle negative economic shocks such as the one occurring now. This adjustment has focused on two issues in particular: reducing the public imbalance and cutting external borrowing.
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...but we don't believe Europe is likely to go through a widespread double dip recession...
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In the area of fiscal adjustment, and although these countries have quite contained levels of public debt (with the exception of Hungary, whose public debt was equal to approximately 80% of GDP in 2010), it can be noted that, with different strategies, the five economies will probably see their public deficit in 2011 reach the area of 3%-4% of GDP (with the exception of Romania, which will remain above this threshold). On average, this is around two percentage points better than their position in 2008.
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With regard to the balance of payments situation, the turnaround has also been notable as the region as a whole has gone from a current deficit equivalent to 7% of GDP in 2007 to one 3% lower in 2010. Here it's worth noting the exemplary case of Romania which, after having recorded in 2007 a current deficit of 14% of GDP, will end this year with a payment deficit in the area of 4% of GDP. In addition to this lower external borrowing there is also a buffer of international reserves that is appreciably larger than the one available in 2008 in the five countries.
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...nor do we think the situation in emerging Europe is the same, as the imbalances present in 2007-2008 have been extensively corrected.
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All this means that we expect the economic deterioration, which is probably inevitable, will not be exceptional in scope, unlike the decline occurring three years ago. The most plausible situation is that the region as a whole will go through a temporary phase of low growth during this last part of 2011 and the first half of 2012, afterwards picking up speed in the final stages of next year.
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