Expert opinions

Central, Eastern Europe: Monetary policy is easing capital market disruption

Central banks in Central and Eastern Europe have, in most cases, contained debt-financing costs for governments that are spending heavily to counter the economic impact of the COVID-19 pandemic. In a report, Scope Ratings agency has looked at how these forces have played out across the region’s capital markets.

“The capacity to implement bond-buying programs and interest-rate cuts by central banks has varied considerably across the Central and Eastern Europe (CEE) region, while government borrowing rates have risen in some countries with elevated external-sector and public-finance risks alongside observation of sizeable portfolio outflows,” says Levon Kameryan, analyst at Scope.

The region’s governments have deployed significant direct fiscal support for households, workers and businesses to mitigate contractions in output prompted by the crisis, equivalent to around 6% of GDP (in direct revenue and expenditure measures) in the cases of Poland and Hungary, around 3.5% in the Czech Republic, and a comparatively modest 2.5% in Russia. Extra public spending and reduced economic output will push government debt ratios up toward 2014 levels in most country cases and weaken government balance sheets over the medium term as gross financing needs rise.

“Overall, in the case of euro area CEE countries, low borrowing rates and investors’ relatively sanguine sovereign risk assessments reflect actions undertaken by the ECB – notably the large-scale asset-purchase programs – in addition to the euro’s reserve-currency status,” says Kameryan.

Among non-euro area EU CEE, large-scale fiscal stimulus packages in Poland, the Czech Republic and Hungary are backed by central bank policy responses that mitigate the tightening in financial conditions.

“Romania, however, has less room for a bolder policy response due to elevated exchange-rate risk given a high proportion of foreign-currency public- and private-sector borrowing. External risks in Turkey are further exacerbated by economic mismanagement, with real interest rates in negative territory after incremental rate cuts, which have amplified weakness in the exchange rate. In contrast, Russia’s fiscal stimulus has so far been modest, with additional fiscal measures and interest rate cuts likely to be forthcoming given its substantial liquid reserves (National Wealth Fund assets of 11.3% of GDP) and policy space. The direct purchase of government bonds on the secondary market is not expected to be on the central bank’s agenda, but longer-term repo funding to banks to support such purchases is possible,” adds Kameryan.

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