Central and Eastern Europe: Full recovery only after 2021

As some of the first in Europe to lift lockdowns, Central and Eastern European countries should see growth rebound in 2H 2020. Uncertainties around the duration of the COVID-19 crisis and exposure to uneven Western European recovery are risks, the leading European credit rating agency Scope Ratings GmbH (part of the Scope Group with headquarters in Berlin and offices in Frankfurt, London, Madrid, Milan, Oslo and Paris) says in a recent report.

Scope is not projecting full recovery in most countries in Central and Eastern Europe (CEE) to pre-crisis output levels until after 2021. Under Scope’s baseline scenario, the expected significant GDP contractions in Q2 2020 in all CEE economies will be followed by recovery from Q3 2020.

“We expect average capacity utilization in CEE to return to around 90% of pre-crisis levels from Q3 under the assumption of a continued global recovery,” said Giacomo Barisone, head of Sovereign and Public Sector at Scope Ratings. “The speed and resilience of the regional recovery, however, will depend on several factors, including the impact of COVID-19 on economies in the second half, the underlying structures of economies, the size and effectiveness of domestic as well as EU stimulus programs – the latter representing a major opportunity for the EU CEE member states — recovery in Western Europe and developments in global energy markets and investor sentiment, especially key for Russia and Turkey, but also for other CEE countries.”

Scope expects highly accommodative monetary policies to be maintained throughout the region over 2020, with only a few central banks likely to deliver more cuts as inflation falls to or below targeted levels due to the pandemic’s severe adverse impact on domestic demand. As uncertainties regarding the duration of the COVID-19 crisis and associated risks to growth linger, Scope expects regional currencies to remain volatile, although they may strengthen further on the back of improving global sentiment.

CEE central banks, alongside the significant actions of the G4 central banks, have in most cases helped contain debt-financing costs in the region. This has resulted in improved investor assessment of sovereign risk, as reflected in a decline in regional one-year euro and dollar sovereign CDS spreads after the sharp increases in March and April, although the magnitude of recent declines has varied by country and spreads remain elevated in the case of Turkey.

Among EU CEE economies, Scope continues to project the most moderate output drop in Poland (4.2%) in 2020, thanks to the economy’s high diversification, and comparatively lower exposure to international value chains and tourism. Hungary (2020 growth forecast: -6%), Czech Republic (-7.5%) and Slovakia (-8.1%) are the most exposed in the region to global value chains, reflecting higher dependencies on respective automotive industries, which had to temporarily halt production. The ability of CEE countries to adapt to structural changes in the automotive sector will be important for maintaining comparative advantages in the post-COVID-19 period, given the EU’s increasing budgetary focus on the low-carbon society.

Scope is projecting a 2020 output drop in Romania of 6.3%, with less room for fiscal stimulus given already elevated budget deficits entering 2020. Scope forecasts Croatia’s economy to contract around 9% this year, Slovenia’s by 7.6% and Bulgaria’s by 7%. On 10 July, Bulgaria and Croatia’s admissions to the Exchange Rate Mechanism II and Banking Union were announced formally by the European Commission. Scope expects the small, open Baltic economies to contract by 7.5-8% in 2020.

Russia’s recovery will be challenged by OPEC+ arranged cuts in oil production, lower-for-longer oil prices, and weak household consumption due to the crisis. Scope has revised down its 2020 growth forecast for Russia from -4.9% to -6.8%. It expects continuity with regards to prudent fiscal and monetary policies following the constitutional changes in Russia, though more profound structural reforms on the domestic side to raise the economy’s weak growth potential are unlikely any time soon.

Turkey’s economy is forecast to contract by 4.2% in 2020. In addition to the severe adverse economic impact of the public health crisis, Turkey’s macroeconomic stability remains exposed to increasing external sector risks, including declines in reserve adequacy and significant exposure to lira depreciation and periods of capital outflow.

Finally, Scope forecasts Georgia’s real GDP to contract 5% in 2020, due to the economy’s dependence on tourism and travel services, which account for around 30% of GDP, including indirect impacts.

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