CEE countries better prepared for crisis than in 2009 - Reduced public debt minimizes danger from limited growth prospects

Source: eKapija Tuesday, 18.10.2011. 15:22
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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 in 2009, as CEE economies are in a completely different stage of their economic cycle and have reduced their imbalances, shows a report by Erste Group.

The debt level of the CEE countries has never been an issue apart from Hungary, where the debt to GDP ratio is still more than 10pp below the Euro Area average (2011F is 85%). Other CEE countries have their debt to GDP well below the 60% of GDP required by the Maastricht treaty.

None of the CEE8 countries is 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.

The current situation shows that now markets better differentiate countries according to their level of debt, which finally matters – the CEE countries are far less indebted compared to the advanced economies.

- If the Euro Area decelerates sharply, Central and Eastern Europe will not avoid contagion. But the CEE region should do much better this time (relative to the Euro Area) than in the post-Lehman period - says Juraj Kotian, one of the heads of the research team.

The fiscal deficits of CEE countries increased during the crisis, but remained well below more problematic Euro Area countries.

Widening of fiscal deficits in CEE had its roots in the pre-crisis period, as countries did not consolidate their public finances sufficiently in the boom years. The high growth of cyclically boosted tax revenues had helped to mask the underlying structural deficits, which later showed up in full force.

The former Achilles Heel of some CEE countries, high current account deficits, have been sufficiently narrowed. The Romanian current account deficit narrowed from almost 14% to below 5% of GDP, Croatia’s from 7% to 1.4% and Hungary’s turned into a surplus of 2.8%, from a deficit of 7% of GDP in 2007. 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.

The gloomy global outlook has also hit Erste Group's forecasts, which have recently been revised down. The most anemic growth is expected in Hungary, where, on top of global factors, local policy decisions play an important role.

- It is hard to believe that the damage done by the slow progress in solving the Euro Area debt crisis could be completely reversed. However, if there is a solution that could calm the markets, this could open the door for some central banks in CEE to proceed with rate cuts. We think that CEE countries are much better prepared to deal with the crisis than they were three years ago. Due to the fiscal and external turn around of the local economies, the economic contraction should not be as severe as in 2009 - Juraj Kotian concludes.

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