Is CEE better prepared for the new storm?

Noiembrie 2011

JURAJ KOTIAN - Co-Head of CEE Macro and Fixed Income Research - Erste Group Bank BANCA COMERCIALĂ ROMÂNĂ S.A.

The reaction of the CEE region to the global slowdown should be less severe (in relative terms to the Euro area) than in the post-Lehman crisis, as CEE economies are in a completely different stage of their economic cycle and have reduced their imbalances.

Three years after the Lehman collapse, the stress on the financial market has returned with full force. The growing debt overhang of advanced economies and too many unanswered questions about the future model of the Euro area have increased uncertainty on the markets.

At first glance, the current situation might look similar to the post-Lehman period, as the spill-over channels remain the same – the potential collapse of global demand and the sudden stop or even reversal of capital flows. The post-Lehman developmentproved that no CEE economy is decoupled from developments in the rest of the world. But there are three reasons why the CEE region should do much better (relative to the Euro area) than in the post-Lehman recession.

The first is that none of the CEE8 countries would be in such a challenging situation in terms of balance of payment problems, the sustainability of the public debt or contingent liabilities in the banking sector like Eurozone peripheral countries. This argument was partially valid also in 2009, but at that time markets were not realizing that CEE countries are far less indebted than governments or the private sector in the Euro area. Since then, markets have started to differentiate more, not only among CEE countries but also in the Euro area.

The former Achilles Heel of some CEE countries, high current account deficits, have been sufficiently narrowed. This has substantially reduced the new external financing needs of the CEE countries, which had been the main source of vulnerability in the past. The progress was achieved very quickly and much faster than in the rest of Europe. Many CEE countries now hold much bigger cushions of FX reserves.

Three years ago, the CEE economies were hit by a strong external shock in the year or a year after their economies peaked. The scaleback of the cyclical component was the biggest contributor to the economic slump in 2009, corresponding to 4/5 ofthe contraction. The CEE economies are running close or even slightly below their potential output, which is a completely different situation compared to an output gap ranging between 1.8% and 10% one year before the Lehman collapse.

 

The debt overhang in advanced economies increases the uncertainty on markets and undermines growth prospects

Global economic sentiment has been deteriorating in recent months and, on top of that, we are witnessing the worst situation on the financial markets since the stress peak in March 2009. CDS on sovereigns went through the roof and the interbank market is paralyzed again. The growing debt overhang of advanced economies and too many unanswered questions about the future model of the Euro area increase the uncertainty, with direct implications for a whole set of economic decisions,starting with denting consumer sentiment, investments in the manufacturing sector and ending with abnormal risk aversion, higher costs of financing and a strong preference for cash or other highly liquid assets worldwide.

 

Hungarian growth should be the weakest in the CEE...

This does not help economic growth, which decelerated already in 2Q. The breakdown of GDP for 2Q published in September revealed that, in many CEE countries, investments and net exports were the only contributor to the GDP growth, while household and government consumption stalled or even contracted. The gloomy global outlook has also hit our forecasts, which have recently been revised down. The most anemic growth is expected (0.9% y/y in 2012) in Hungary, where, on top of global factors, local policy decisions play an important role.

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