Research Dept. News
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Monthly Report, num 353 - January 2012
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European union - Emerging Europe
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Emerging Europe: forecasts are down
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The euro area entering recession forces down the 2012 growth forecasts for emerging Europe.
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Emerging Europe is changing its economic phase. In strong contrast with its past macroeconomic trend, still relatively dynamic, substantial evidence is coming to light that the final part of 2011 will have been notably weak and the bulk of the evidence available points to this trend getting worse during the first few months of 2012. Nevertheless, as 2012 advances, activity should recover quite quickly and the year should end in a more vigorous phase in preparation for a slightly better 2013. Let us develop the arguments that construct the scenario in a little more detail.
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First of all, let's begin with the business indicators published. In particular, the indicator of economic sentiment, whose aggregate nature and available data for October and November make us expect the growth rate to have slackened off in the fourth quarter in the Czech Republic, Hungary, Slovakia and Romania. The exception, due to the inertia of its domestic demand, will be Poland, which will keep an almost unchanged rate from the good figure posted in the third quarter. From here on, the first quarter will probably be the weakest since the 2009 recession. In 2012 as a whole, this group of five countries will grow on average by 1.4%, practically half the rate for 2011 and far from the 2.3% being forecast just a few months ago.
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In 2012, growth overall will be 1.4%, half the figure for 2011.
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These are notably worse figures than the ones being proposed at the end of the summer, justified by two negative developments that, although anticipated, are looking more serious than expected. The first of these developments is the lower growth forecast for the euro area. Only three months ago, analysts in general expected growth for the euro area to be around 1.3% in 2012. The most recent forecasts have reduced this figure to a GDP flash estimate of 0.3%. Moreover, it is now more likely that the actual figures will be worse for the euro area. In short, the reference market for emerging Europe, the euro area, is moving away from a scenario of moderate slowdown to a much sharper deceleration.
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The negative development of the euro area is not limited to the area of activity. The sovereign debt crisis has negatively and simultaneously affected the country-risk indicators of the five aforementioned economies. Although the market discriminates according to different fundamentals (in particular, assigning more solvency risk to Hungary than to the rest), the upswing in the risk premium has moved in line with the risk premia of those countries most affected in the euro area.
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Peripheral debt tensions infect the risk premia of emerging Europe.
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In a word, the sum of these two events (a sharper economic slowdown than expected in the euro area and greater contagion of financial stress) justifies the growth forecast being cut. At this juncture, we should ask ourselves what would happen if 2012 turned out to be even worse than expected and the gentle recession expected in the euro countries in the fourth and first quarters mutated into a serious, full-blown recession. One simple way of analyzing those countries hardest hit by this situation is to classify the five countries in terms of their level of country-risk and degree of commercial exposure to the euro area. The intuitive logic underlying this categorization is the belief that, if a serious recession occurs in their export markets, those countries with a higher country-risk will have less fiscal leeway to alleviate the loss in activity.
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Under such premises, the region's weak spot is Hungary, whose exports to the euro area account for 38% of GDP and whose risk premium for three-year bonds is in the order of 500 basis points. It is no surprise that, given the fiscal and economic risks, the Hungarian government has initiated talks with the International Monetary Fund and the European Union to access some kind of international credit of a preventative nature. Although negotiations are expected to be complicated, given the not very conventional way the government has attempted to restrain its public deficit, one initial encouraging sign has been the government's readiness to amend the harmful banking legislation it has been implementing over the last two years.
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Should the situation in the euro area get worse, Hungary might be the most affected and Poland the least.
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Poland is in an almost opposite position. Although its fiscal leeway is not as wide as what it had (and took advantage of) in 2009, its smaller commercial exposure (exports to the euro area account for just under 20% of GDP) isolates it somewhat from the cycle of Germany and other euro area countries. Moreover, its country-risk premium, slightly above 200 points, does not represent the great limitation under which Hungary's fiscal policy has to operate.
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The other three countries are in positions of intermediate risk. Impact via exports is greater for the Czech Republic and Slovakia but doubts regarding public solvency are stronger in Romania. In short, and although these considerations do not pretend to summarize all the national idiosyncratic risks, we believe that, in a more adverse scenario, Hungary would be highly exposed while Romania, Slovakia and the Czech Republic would be next in seeing their growth affected. In all these cases, in a scenario of serious recession in the euro area, their respective economies would also enter recession. Poland, which would undoubtedly see its growth affected, might avoid a fall in GDP or, should a drop occur, this would not be very extensive.
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